3 Restaurant Stocks Worth Nibbling On

The restaurant industry was impacted by the pandemic as much as any other industry this year. Lockdowns and capacity restrictions caused most to follow the digital sales blueprint to feed hungry customers—and keep themselves alive.

While most restaurants are still not operating with a full stomach, some are not far away from returning to their pre-pandemic financial performances.

The restaurant stocks have been hard to play this year because investors have had to essentially take a leap of faith on vaccine progress and the idea that over time people will feel comfortable dining out. With vaccine distribution underway in the U.S., here are some restaurant stocks that may gather a lot of attention in 2021.

Will Darden Beat Earnings Again This Week?

Darden Restaurants (NYSE:DRI) operates Olive Garden, LongHorn Steakhouse, and other popular restaurant brands in the U.S. and Canada. The stock has almost returned to its pre-pandemic level because the market seems to think the worst is over.

Sales declines seem to be moderating as restaurants have reopened and customers have embraced pickup and delivery options. Last quarter sales were down 29% compared to 48% the quarter before. Management sees this trend continuing in the current quarter with the sales decline improving to 18%.

Darden's longer-term success will ultimately depend on people's willingness to return to Olive Garden and LongHorn locations which together account for roughly 70% of the business. But with dining room capacity likely to remain limited for the foreseeable future, the company will need to continue to lean on digital sales to keep things moving in the right direction. Based on how the business has performed in recent quarters, takeout and delivery orders can keep leading the charge while restaurant attendance improves.

Darden is getting ready to report quarterly results before the open on December 18^th. The Street is expecting EPS of $0.72 (on revenue of $1.7 billion) which represents a 36% decline from the same period last year.

But a big reason why Darden's stock has moved steadily higher since March is the company's ability to manage costs and overdeliver on earnings. Investors should look for Darden to extend its streak of positive earnings surprises to seven quarters later this week.

The technicals point to potential upside for Darden as well. Back on December 1^st, a bullish symmetrical continuation triangle formed when the stock closed at $110.51. The intermediate-term pattern suggests Darden's price may be headed to the $128 to $133 range in the not-too-distant future.

How are Brinker International's Financials?

Brinker International (NYSE:EAT) is another restaurant stock that should be on the investor's menu. Its chart has followed a similar trajectory as Darden's this year. Brinker's stock now has its sights on eclipsing its $63.40 all-time high from February 2015.

The owner and franchisor of Chili's Grill & Bar and Maggiano's Little Italy restaurants has followed a similar script as Darden relying on non-traditional sales. Expectations have been low heading into each of the last three earnings reports, but the punch line has been the same. Brinker has delivered some sizeable earnings beats of late and may be setting the table for a fourth big beat.

However, unlike Darden, Brinker's balance sheet is a bit sloppy. It carries nearly $1.2 billion in long-term debt compared to $44 million in cash.  Although management has focused on paring the debt burden, this has come at the expense of suspended dividends and share buybacks which have been a big part of Brinker's stock performance over the years.

But this should turn out to be a good move in the long run. In the meantime, expect the strength of the Chili's brand and a strengthening digital platform to keep the lights on. Investments in technology such as table-top ordering devices and digital ordering are making Brinker a more efficient business in takeout, delivery and dining.

Brinker's charts have formed all sorts of classic technical patterns over the last few months. Most recently a bearish continuation wedge points to a possible slide to the $38 to $41 range. However, prior to this, five bullish price patterns had formed most of which foreshadowed a potential climb to around $56 to $60.

Brinker is one of the more attractively valued stocks in the restaurant space at 19x forward earnings. And while most restaurants have put expansion plans on the back burner, Brinker has boldly moved forward to expand its global footprint. International expansion including in faster-growing emerging markets should eventually bear fruit as global economic conditions normalize.

Is Denny's Stock a Buy?

The recovery at Denny's (NASDAQ:DENN) has been slower, but the stock may have more upside than other restaurant peers.

Denny's sales and earnings likely reached an inflection point in the second quarter. The third quarter results showed improving performance as customer traffic increased and digital sales remained solid. Besides curbside pickup and shareable family packs, Denny's pandemic response included the launch of the Denny's Market which sells bread, eggs, bacon, and other common household foods to consumers seeking an alternative to the grocery store.

And while most restaurants have used the unusual environment to revamp their menus, Denny's has implemented an extreme overhaul. Around 80% of core menu entrees have now changed or improved since the start of Denny's brand revitalization a decade ago. The result? Better customer satisfaction scores and sales growth.

But the most compelling aspect of Denny's turnaround story is the company's transition to a franchise model. Absent the burden and expense of ownership, the Denny's of tomorrow will carry less business risk by leaning on a franchise-first approach.

Hedge fund activity also gives credence to the notion that Denny's stock may be a Grand Slam. Last quarter hedge funds added more than 2 million Denny's shares to their portfolios tripling their holdings in the company from the second quarter. Well regarded fund manager Ken Fisher alone started a $23.9 million position.

Earlier this week Wells Fargo initiated coverage of Denny's with a buy rating and $16 price target. While this doesn't imply a ton of upside (about 13%), there's a chance analyst target prices trend higher as vaccine distribution progresses and Denny's operating environment improves.