Tightening Their Belts When Eating Out

04/13/2009 11:00 am EST

Focus: STOCKS

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith and Josh Levine of ChangeWave Research say their latest surveys show little appetite for anything other than fast, casual food—good news for McDonald’s.

Given the endless parade of depressing economic news, it's no wonder that most people have lost their appetite for food—if not altogether, then at least for finer dining.

After a 16-month long downward spiral, consumer restaurant spending is still contracting—but the rate of decline is leveling off. Fifty percent of respondents [to a recent ChangeWave Alliance survey] said they would spend less money at restaurants going forward, and that was two points better than February.

Thirty-four percent (34%) of respondents expect to dine out less frequently over the next 90 days, compared to just 6% who say they'll dine out more frequently. We do note, however, that this is a net six-point improvement from the last time we asked this question in November 2008. Thirty-three percent of consumers said they'll dine at less expensive restaurants, compared to just 1% who said they'll dine at more expensive restaurants.

For the second consecutive survey, reduced income rose as a key concern (up five points to 38%), and is now one of the top reasons why consumers expected to dine out less frequently. Job security concerns (up two points to 14%) have also moved up as a key reason why consumers are dining out less frequently.

While fast food restaurants remain a top segment, upscale/fine dining restaurants  continue to take the biggest hits, with only 3% of respondents saying they would dine at them more often during the next 90 days, and 37% saying less often.

Food service consultant Technomic confirmed our Alliance findings when it reported that domestic sales growth at the 500 largest US restaurant chains slowed to 3.4% in 2008 from 5% the year before. Technomic said the sales increases came at quick casual family and fast food restaurants, including McDonald's. Just 5% said they would spend more at restaurants, which is unchanged from the all-time low.

In the most recent survey period, McDonald's (NYSE: MCD) enjoyed comparable-store growth of 7.2%. The strength in MCD was consistent with our most recent findings, which showed that diners are choosing less expensive alternatives.

Interestingly, the US is not McDonald's number-one geographic market; Europe is, having produced 42.2% of 2008 revenues. The US generated 34.3% of revenues. Asia/Pacific, the Middle East, and Africa contributed 16.7% of revenues.

McDonald's is a solid stock to be holding these days, and one of the best reasons is its 3.8% dividend yield. While many blue chips have recently cut dividend payments, MCD raised its dividend by 33% in September.

We continue to recommend that you accumulate McDonald's shares on pullbacks below $55. Buy aggressively below $52. (The stock closed below $57 Thursday—Editor.)

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