As diners line up, another fast casual chain sizzles on debut

Reuters

Published Nov 20, 2014 03:36PM ET

As diners line up, another fast casual chain sizzles on debut

By Neha Dimri and Sruthi Ramakrishnan (Reuters) - Shares of Habit Restaurants Inc more than doubled in their trading debut, underscoring the growing appetite among investors for stocks of fast casual restaurant chains - increasingly, the choice of health-conscious diners.

Restaurants such as El Pollo Loco Holdings Inc (O:LOCO) and Zoe's Kitchen Inc (N:ZOES), which also made their public debut this year, have caught diners' imagination with fresh ingredients and options like whole wheat and gluten-free foods.

That has sent growth-hungry investors scouting for the next Chipotle Mexican Grill Inc (N:CMG).

Including Habit, known for its charburgers, five restaurant operators have raised about $486 million in U.S. IPOs this year, compared to $231 million raised by two restaurants last year.

All but one of this year's debutantes are fast casuals.

"People are moving from fast food to specialty restaurants," said Joseph Schuster, founder of IPO research firm IPOX Schuster LLC.

"It's a long-term structural trend and some of these specialty IPOs fit that niche very well and there is strong underpinning demand for these deals."

Shares of Zoe's Kitchen, which shot up 74 percent in their debut in April, have more than doubled since then, and El Pollo Loco's are near that mark.

Zoe's shares are trading at 351.34 times forward earnings, and El Pollo at 48.92 times forward earnings, compared with 15.94 times for McDonalds's Corp (N:MCD) and 38.73 times for the overall restaurant sector, according to StarMine.

J. Alexander's Holdings Inc has filed for an IPO, and Shake Shack is reported to have picked banks for an offering.

The investor demand comes handy for fast casual restaurants looking to expand.

Habit, present in only four U.S. states, and Zoe's plan to double the number of restaurants in next four years.

Sales of U.S. fast casual restaurants are expected to exceed $50 billion by 2018, from about $34.5 billion in 2013, according to research firm Technomic.

Not all fast casual operators have been able to sustain the euphoria surrounding their public debuts, because of issues specific to their business.