3 Restaurant Stocks Ready To Rally

Key Points

• BJ's Restaurants is lagging behind the restaurant sector while performing at the top of its game. 
• The Cheesecake Factory still faces headwinds but is gaining analysts' support. 
• Brinker International is the underdog and in a position to outperform in Q2. 

Restaurant stocks have defied inflation and are producing growth in 2023. Leaders in the group are rallying and on track to set new highs, but the laggards, which are performing just as well as the leaders, are still suffering. Some recent analyst activity may alter the situation and has opened the door to significant gains.

There are still headwinds for names like BJ’s Restaurants NASDAQ: BJRI, Brinker International NYSE: EAT, and The Cheesecake Factory NASDAQ: CAKE, but the potential rewards outweigh the risks. 

BJ’s Restaurants: Improves Operational Quality, Is Growing 

BJ’s Restaurants is a chain of micro-brew-focused properties under the BJ’s Restaurants umbrella. They feature pizza, sandwiches, and company-made draft beers in a comfortable, upscale setting. The company has rebounded from the depths of the pandemic and is producing revenue and earnings at new highs.

The gains are driven by increased comp traffic amplified by new store openings on track to continue in 2023. The analysts expect another solid quarter when the company reports at the end of July, and it will likely outperform the consensus again. 

While upping their share price targets, the analysts have been trimming their targets for revenue and earnings. Regardless, the consensus figure assumes YOY and sequential growth if at a slower pace than before. If the analysts are correct, Q2 growth will slow to about 8%; the takeaway is that this is well above expectations for the broad market S&P 500 and consistent with reports from names like Darden Restaurants and Bloomin’ Brands.

Regarding the analysts, the stock has received numerous price target increases since February, suggesting it should be trading above consensus. The latest is from Benchmark, which set a price target of $40 or 15% above consensus and 30% above the recent price action. 

Wells Fargo Takes A Bite Out Of The Restaurant Sector 

Wells Fargo took a big bite out of the restaurant sector by initiating coverage on 3 names, including Texas Roadhouse NYSE: TXRH, The Cheesecake Factory, and Brinker International. Texas Roadhouse is an easy choice because it is the group leader and has been rallying on results.

Wells initiated this stock with an Equal Weight rating and a price target of $113. That’s $2 below the consensus, which implies about a 5% of upside for this 2% yielder. The trend in the consensus flatted following the last earnings report but should resume the uptrend after Q2 results are released. The average rating on this stock is Hold, down from Moderate Buy last year. 

The Cheesecake Factory has struggled over the last year but is in a position to benefit from the summer travel season. Wells Fargo also initiated this stock at Equal Weight with a price target about 2% above the action.

This stock is rated at Reduce by the broad analyst community, but the price target data is telling. The consensus price target assumes about 12% of upside for the stock, and it has firmed over the last 3 months. In addition to Wells Fargo, the stock has received more than a half dozen price target increases and at least 1 other initiation that suggests support is firming.

Cheesecake Factory reports Q2 results in early August and is expected to post mid-to-high-single-digit sales growth and wider margins. 

Brinker International: The Underdog Is Ready To Bounce Back

Brinker International owns and operates Chili’s, among other franchises. Wells Fargo initiated the company at Underweight with a price target of about 10% below the action. This contradicts the Hold rating established by the community and the price target, which assumes about 10% of the upside.

The question is if this chain will be able to perform as expected, which is to say, consistent with the field, and that should be easy.

The company has been outperforming regularly, and the consensus targets for earnings and revenue are edging lower. Revenue is expected to be flat sequentially, underestimating the seasonally expected uptick in business and opening the door for significant outperformance.