Restaurant ETF Can Endure Earnings Rough Patch

Markets Benzinga

ETF Managers Trust The Restaurant ETF (BITE) has been a solid performer, but this week's batch of restaurant earnings reports could be seen as cause for concern.

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For example, after the close of U.S. markets Thursday, already embattled Chipotle Mexican Grill, Inc. (CMG) slid after delivering another round of disappointing earnings. Chipotle reported adjusted earnings per share of $0.87 and revenues of $998.4 million. Restaurant sales comparables were down 23.6 percent and restaurant transactions decreased 19.3 percent. Analysts had a consensus EPS of $0.93 on sales of $1.05 billion. Net income was $25.6 million, a large drop from $140.2 million.

Starbucks Corporation (SBUX), the world's largest coffeehouse operator, also tumbled during Thursday's after-hours session after delivering earnings of $0.49 per share were in line with the Streets consensus, while revenue of $5.2 billion came in below estimates of $5.35 billion. Still, sales hit a Q3 record. In the same quarter last year, the company posted earnings of $0.42 per share on revenue of $4.881 billion.

Related Link: Goldman Grades America's Restaurants; Recommends Buy On Domino's, Starbucks

Beyond Baristas And Burrito Bowls

Yes, Chipotle and Starbucks are BITE holdings, but in the case of the first and only dedicated restaurant ETF on the market, BITE's index is designed to endure single-, or in this case, dual-stock risk. The BITE Index is equal-weighted, an important consideration for an ETF in this market segment.

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An equal-weighted approach helps to minimize the outsized impact that a few mega-cap restaurant operators can have on more traditional, market cap-weighted indexes. For example, under BITE's methodology, small but faster-growing companies like The Habit Burger and Shake Shack receive the same weighting as a global giant like McDonald's, according to BITE's issuer.

Additionally, BITE deserves some credit for its year-to-date performance. Prior to the release of the Chipotle and Starbucks earnings reports, the restaurant ETF was sporting a year-to-date gain 7.3 percent. That is more than 330 basis points better than the 2016 returns offered by the largest consumer discretionary ETF.

BITE can handle near-term earnings headwinds because the long-term fundamental picture for the ETF and the broader restaurant industry is bright. Low interest rates equal franchise and non-franchise store growth both domestically and internationally. Likewise, low oil prices should translate to increased disposable income, which should trickle down to more dinners and lunches out.

The long-term trend (150 years) of eating out verus eating at home, that has finally crossed over 50 percent of people now are eating out more while grocery store sales have fallen for more than three decades, according to BITE's issuer.

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