The fundamental outlook for restaurant companies is favorable according to NationsBanc Montgomery Securities' senior restaurant and lodging analyst, Michael Mueller, who believes a number of restaurant companies are positioned to increase earnings and produce above-average investment results in 1999. 

Mueller made his remarks during a luncheon presentation at NationsBanc Montgomery's 16th Annual Hospitality Conference that has attracted 59 companies from across the nation. The conference, featuring presentations and panel discussions geared around the premier growth companies in the lodging, lodging REIT, timeshare, cruise line, ski resort, gaming, auto rental and restaurant industries, started Monday, January 25th and closes today, Friday, January 29th at the Pierre Hotel.

Mueller noted that restaurant stock prices as a whole moderately underperformed the SP 500 over the past five years -- and especially in 1998. However, he noted that the restaurant sector rarely trades as a group; rather, individual stocks trade according to an individual company's performance and numerous stocks showed very strong absolute and relative stock price performance in 1998.

The fundamental outlook for restaurant stocks is positive, according to Mueller. Since 1980, the restaurant industry has been a growth business. In recent years, there has been some slowdown in development while demand has enjoyed a modest recovery. Additionally, the cost environment remain manageable, which, together with the fact that most companies have strong balance sheets, has and should continue to allow better positioned restaurant companies to continue to generate above average earnings growth. Mueller noted that most companies within this sector grow more rapidly than the SP and should be attractive to investors in 1999.

However, he noted that not all restaurant chains are realizing the same success; those who have figured out how to deliver what the customer wants on a consistent basis are the most successful and profitable. With regard to the quick service segment of the industry, as companies focus less on unit growth and more on earnings stability, their valuations should improve as they provide shareholders with lower earnings risk, greater predictability and higher returns. Quick service restaurant chains that have moderated their development have enjoyed more favorable same-store sales. The segment as a whole reported a 4.2% increase in same store sales during the first three quarters of 1998.

Mueller focused the final part of his presentation on high-volume event dining companies -- companies that enjoy strong unit revenues of $5-14 million and have strong consumer appeal, he says. These restaurants are usually larger, well-located operations that have one or more truly distinctive element, such as a superior or differentiated menu, ambiance, or some other feature (e.g. amusements). Elements such as these provide consumers with a superior experience for a reasonable price that is usually about the same as the price offered at a typical casual dining restaurant.

Because of their high average unit volumes and unit level profits, these chains generate exceptionally strong unit level economics, with cash-on-cash returns of over 40 percent. According to Mueller, their high returns allow for very rapid unit growth.

Mueller expects to see significant growth due to the comparatively smaller size of these event-dining chains. He noted that, for instance, Il Fornaio has only 17 units, Dave Buster's has only l9 units, P.F. Chang's China Bistro has only 23 units and Rainforest Cafe and Cheesecake Factory each have only 28 units. Mueller predicts the following chains will add units and grow earnings very rapidly over the next several years and he is recommending the following stocks: P.F. Chang's China Bistro*, Dave Buster's*, Rainforest Cafe*, The Cheesecake Factory* and Il Fornaio*.

NationsBanc Montgomery Securities LLC, a subsidiary of BankAmerica Corp., is a full-service investment bank and brokerage firm with approximately $2.7 billion of regulatory capital. The company provides research, trading and issuance in the equity and fixed-income markets (high yield, emerging markets, high grade and mortgage-backed markets). Other services include MA advisory, financial buyer coverage, loan syndications, global investment banking, real estate finance, mortgage finance, money markets and a primary dealer.

NationsBanc Montgomery Securities is a registered broker-dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers and the New York Stock Exchange.

* NationsBanc Montgomery Securities LLC currently maintains a market in this security. NationsBanc Montgomery Securities LLC was manager or co-manager of a public offering and/or has performed investment banking or other services for this company in the last three years.