Restaurant Stocks Go on Sale…Which Are Really on the Value Menu?

Key Points

• Brinker International is down 24% since August 1st and struggling with slower customer traffic and lower profits.
• Although Cracker Barrel traffic has slowed in recent months, plans for winning over a broader set of customers and a 7.9% forward dividend yield make it a strong value proposition.
• Wendy's is trading below $20 per share and has a forward dividend yield that is up to 5%.

The recent flare up in inflation and interest rates are taking a toll on much of the consumer discretionary sector. Since August 1st, department stores, casinos, RV makers and residential construction companies have been some of the stock market’s worst performers. Even high-flying restaurants are suddenly feeling the heat. 

For many budget-minded Americans, higher menu prices and rising credit card rates are a recipe for eating leftovers at home. Following a mixed bag of second quarter earnings reports, this has put pressure on a restaurant group that rebounded to an all-time high this summer. 

When economic conditions worsen, dining out or ordering takeout are among the first things to get wiped from the budget. Signs of this emerged in several Q2 results. Despite price hikes, Domino’s Pizza, Papa John’s and Jack in the Box each posted negative year-over-year revenue growth. Bloomin Brands, Yum Brands and The Cheesecake Factory reported low-single digit growth.

Concerns of another pause in the industry’s arduous post-pandemic recovery have put restaurant stocks on the back burner for growth investors. Fast food, fast casual and casual dining chains have all been hit. 

On the bright side, this has opened the door for value investors to browse through a menu of cheaper restaurant share prices. Some are ‘meal deals.’ Others are ‘still overpriced.’ 

Chili's: Still Overpriced

Brinker International, Inc. NYSE: EAT is down 24% since August 1st. The company behind Chili’s Bar & Grill and Maggiano’s Little Italy is struggling with slower customer traffic and lower profits. With its traditional playbook of discounts and promotions failing to ignite a spark, new CEO Kevin Hochman is reversing course. Promotional activities are being pared back while menu prices are being raised. It is a formula that makes sense for margins but is unlikely to resonate with cash-strapped Americans. 

At 15x trailing earnings, Brinker International is trading in the middle of its historic range. This suggests the stock is fairly valued — but given the weak near-term outlook and uncertainty around the new leadership team’s ability to execute in a tougher environment, it may actually be overvalued. Management will need to deliver consistent earnings growth in the quarters ahead to make EAT more appetizing. 

Cracker Barrel: Meal Deal

Like Brinker, Cracker Barrel Old Country Store, Inc. NASDAQ: CBRL also trades at 15x trailing earnings. However, unlike Brinker, which has yet to reinstate its dividend, Cracker Barrel pays $1.30 per share quarterly dividend. This amounts to a whopping 7.9% forward dividend yield that is by far the best among established restaurant operators. FAT Brands offers an 8.6% yield but, as a financially unstable micro-cap, carries a ton of risk.

Cracker Barrel’s value proposition gets better when we look ahead to next year. The stock has a 2024 P/E ratio of 11x, which is one of the lowest in the space. Although traffic has slowed in recent months, a new ad campaign focused on younger diners and a new rewards program bode well for winning over a broader set of customers. If Cracker Barrel can retain its older customer base enamored with homestyle fare and adjoining gift shops while simultaneously attracting Millennials and Gen Z, future financial results will be tastier than expected.

Wendy's Meal Deal

Like its $5.00 ‘Biggie Bag’ deals, The Wendy’s Company NASDAQ: WEN offers good value at current levels. The fast food stock is trading below $20 per share and the forward dividend yield is up to 5%. This is second only to Cracker Barrel among $1 billion-plus market-cap restaurants. Wendy’s P/E ratio based on 2024 earnings estimates is 18x, the lowest it has been since 2020. Last year, the stock traded in the 19x to 30x range. It is also inexpensive relative to peers like McDonald’s and Yum Brands which are trading around 21x next year’s earnings.

In addition to adding more units in the U.S. and international markets, the key growth drivers for Wendy’s are 1) breakfast and 2) digital. As part of the company’s push to draw morning commuters, it recently rolled out ‘2 for $3’ Breakfast Biggie Bundles that come in 10 different combinations. 

Earlier this year, Wendy’s joined forces with underground logistics innovator Pipedream to test robot-based delivery of digital orders to designated parking spots. With many restaurants raising prices and cutting discounts, Wendy’s expanding lineup of meal deals and use of convenient next-gen technologies should give value investors the munchies.