Will Robots Make Restaurants like Denny’s more Valuable?

Robots might make restaurant stocks like Denny’s (NASDAQ: DENN) into long-term value investments.

Kitchen robots might increase cash flows and revenues at Denny’s by reducing expenses and solving one of the restaurant industry’s biggest problems a growing labor shortage. The kitchen labor shortage is getting worse and it’s driving up operating costs all over the nation.

The Flying J Truck stop chain is so desperate for help; that it’s now using aggressive recruiting tactics like those employed by Silicon Valley and the military, Bloomberg reported. Operators like Denny’s and Flying J; a major fast-food franchise owner, are now offering signing bonuses, free meals, higher pay and more time off to attract fry cooks.

Turnover in the restaurant industry reached 113% in September 2016, a surge sign of a labor shortage that’s growing worse. Wendy’s (NYSE: WEN) is now offering $250 bonuses for burger flippers in Florida. Restaurant labor shortages have also been reported in cities as diverse as Denver and Charleston.

A big reason for the shortage is that more jobs are available in potentially higher-paying industries like construction, manufacturing retail and in some parts of the country; marijuana. A related problem is that those industries offer better working conditions and the same pay for less work. Other problems include an aging population and high housing costs in some areas of the country.

Are Robots the Solution for Restaurant Labor Problems?

Robotics might offer the solution for restaurant labor problems and that solution is right around the corner.

A company called Miso Robotics just unveiled Flippy a robotic fry chef that can cook burgers. Flippy is a potential game changer because it can be built and implemented with off the shelf technology. Miso intends to test Flippy at CaliBurger restaurants in Los Angeles next year.

Flippy would be the ideal solution for chains like Denny’s; which operate 24 hours a day seven days a week. If it works as advertised; Flippy would allow Denny’s to greatly expand its’ footprint at a lower cost. Denny’s might be able to expand to more small towns, and open up in more locations like truck stops, train stations, hotels, rest stops and airports.

Robots are invading the Kitchen and that’s Good for Denny’s

Nor will Flippy be alone in the kitchen; a British company called Moley Robotics is touting a “robotic kitchen.”

The “Kitchen” is actually a pair of robotic hands that can be programmed to prepare meals or perform other tasks such as dishwashing. Moley claims it can be programmed to mimic the cooking skills of master chef. If Moley’s Robotic Kitchen is real it might allow chains like Denny’s to offer near gourmet cuisine at Grand Slam prices.

Another fascinating concept is Zume Pizza, a San Jose area chain that uses $25,000 to $35,000 off the shelf industrial robots from ABB Group to make pies. Zume is proving that it is possible to use existing, off-the shelf robots in restaurants right now. It is unclear if Zume’s business model is sustainable because it will have to sell a lot of pizzas to cover the cost of those robots.

How Robots can Help Denny’s

If they get perfected kitchen robots might add lot of value to lower-end restaurant operators like Denny’s.

One obvious advantage might be to add more expensive items to the menu; and a more varied menu. Another would be to be open longer hours and to increase the number of locations.

A problem a chain like Denny’s has is that it’s usually easy to find wait staff; they get tips, lots of down time at some locations and free meals. Yet it can be hard to find chefs and cooks, because kitchen work is hot, greasy, labor intensive and low paid. Robots might make it possible to have a diner with just wait staff.

Eateries like Denny’s need all the help they can get right now. Even though Denny’s operates over 1,700 operations and supposedly has a 6.55% profit margin; it reported a net income of just $17.82 million and a free cash flow of $5.004 million on March 31, 2017. To make matters worse, Denny’s reported revenues of $510.22 million on the same day.

It’s obvious that high operating costs are eating up Denny’s profits. Denny’s shareholders are getting punished too. The stock had a 29.74% return on equity n March 31, 2017, meaning that shareholders lost almost one third of their investment.

Not surprisingly there was no dividend and even less float. Denny’s reported cash and short-term investments of $1.74 million and $70.51 million in cash from operations on March 31, 2017.

A Value Stock to Buy for Restaurant Automation

Some contrarians will wonder if Denny’s will become a value with restaurant automation. I would say no because there will simply be too much competition particularly from supermarket operators like Kroger (NYSE: KR).

Fortunately there is a potential value investment for restaurant automation. It is ABB (NYSE: ABB), the Swiss company that makes Zume’s robots. If ABB’s robots can make pizza; they might be adaptable for a wide variety of restaurant tasks; such as burger flipping with Miso’s software. Miso’s business plan is to sell operating software for kitchen robots.

ABB is already in the robot business and financial numbers indicate that it is a value investment right now. Ycharts data that indicates ABB is a value investment includes:

• A net income of $2.123 billion on March 31, 2017. This was a $254 million increase over March 2016, when ABB reported $1.869 billion in net income.

 

• A profit margin of 9.22% on March 31, 2017.

 

• A free cash flow of $317 million at the end of first quarter 2017.

 

• Revenues of $33.78 billion on March 31, 2017.

 

• Assets of $40.31 billion on March 31, 2017.

 

• Cash and short-term investments of $6.786 billion on March 31, 2017.

 

• $4.108 billion in cash from operations on March 31, 2017.

 

• A market capitalization of $53.55 billion on July 13, 2017

• An enterprise value of $54.83 billion on July 13, 2017.

 

• A low share price of $24.98 on July 13, 2017.

 

• A return on equity of 15.43% on March 31, 2017.

 

• An annual dividend of 76.3¢ a share; last paid on April 18, 2017.

 

Restaurants Might be a Cash Cow for ABB

ABB is already a really good company and it might soon get better. There’s a huge potential market for kitchen robots out there.

Remember there’s a burger joint or a pizza place on almost every street corner in America and a Denny’s in almost every town. A company like Denny’s with 1,900 locations is a huge potential market for robots. There’s also supermarkets which are increasingly reliant on sales of hot meals, hotels, truck stops, cafeterias and Amazon (NASDAQ: AMZN) which is eyeing the food-service business.

An intriguing business model for companies like ABB would be a restaurant franchise that includes the cooking robots. The franchisee would buy or lease the robots and download the recipes they would prepare for a fee. The lease payments from all those kitchen robots would be a great source of float. An existing chain with a well-established brand; like Denny’s, would be an excellent “test kitchen” for this concept.

Robots makers like ABB; and not franchisers like Denny’s, are the future value investment in restaurants. Those who buy them now might make a lot of money in the future.