As part of our national response to the Covid-19 pandemic, many Americans considered it their patriotic, if not moral, duty to support the restaurant industry. And while many consumers were intensely focused on their small, local restaurants, the national chains were still open for business during this time.
And the reality is that the national chains are going to be the most adaptable to whatever pace of economic recovery we see. Hopes for a “V” shaped recovery have pretty much gone out the window. The new model suggests a stair-step recovery may be the best-case scenario.
The worst case scenario for the restaurant industry will be one where different regions of the country are subject to rolling lockdowns. In a business with notoriously low margins, an open/close, open/close recovery would be disastrous.
It’s one reason why I’m not sure I would be diving into restaurant stocks right now. But the same was being said of airline stocks and cruise line stocks. And sure enough, discount investors have been trying to invest in these stocks.
But as all 50 states have now re-opened in some fashion, it’s not unlikely that restaurant stocks are drawing attention from investors. We’ve put together this presentation that highlights seven restaurant stocks that you should consider looking at if you want to dive into this sector.
Quick Links
- McDonald’s
- Wendy’s
- Chipotle Mexican Grill
- Domino's Pizza
- Texas Roadhouse
- Darden Restaurants
- Starbucks
#1 - McDonald’s (NYSE:MCD)
Let’s start with one of the usual suspects. Although some people will always be cynical about McDonald’s (NYSE:MCD), it continues to show an ability to adapt to circumstances. The stock has nearly made back all its losses for the year, and analysts are expressing optimism about the company’s future plans.
And it seems a lot of those plans simply involve listening to what their franchise owners are asking for. The company continues to streamline its menu to help drive efficiency. But the company is also benefiting from a successful reopening of many of its dining rooms.
There are uncertainties about the national reopening, but a company with a strong balance sheet like McDonald’s is better suited to handle an environment that may see renewed or modified lockdown measures.
The company is not without its issues. There is some concern about recent sexual harassment complaints filed against the company. And investors will be keenly eyeing the company’s second-quarter earnings report in July to see clear evidence that the prior quarter’s disappointing report was a fluke.
About McDonald's
McDonald's Corporation operates and franchises restaurants under the McDonald's brand in the United States and internationally. It offers food and beverages, including hamburgers and cheeseburgers, various chicken sandwiches, fries, shakes, desserts, sundaes, cookies, pies, soft drinks, coffee, and other beverages; and full or limited breakfast, as well as sells various other products during limited-time promotions.
Read More - Current Price
- $290.89
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 12 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $319.46 (9.8% Upside)
#2 - Wendy’s (NASDAQ:WEN)
If you’re going to have McDonald’s, you might as well add Wendy’s (NASDAQ:WEN). But this isn’t just a question of competition. Wendy’s is standing on its own two feet and making itself extremely relevant in a crowded field.
And one of the reasons for that has been the surprising success of its breakfast menu. The company must have felt cursed when it introduced the breakfast offerings in March. The week before much of the nation shut down, the chain launched breakfast and saw overall sales increase by 15%.
There was a lot of concern about the company’s ability to keep this momentum going throughout the pandemic. And that was reflected in WEN stock price which dropped approximately 70% from February 21 through March 18. But then the company started seeing stable sales, particularly with its breakfast offerings.
It also hasn’t hurt that the company delivered earnings where earnings were essentially in-line with analysts’ expectations. No company will be ready to take victory laps anytime soon, but Wendy’s looks well-positioned to be a strong player as the economy reopens.
About Wendy's
The Wendy's Company, together with its subsidiaries, operates as a quick-service restaurant company in the United States and internationally. It operates through Wendy's U.S., Wendy's International, and Global Real Estate & Development segments. The company is involved in operating, developing, and franchising a system of quick-service restaurants specializing in hamburger sandwiches.
Read More - Current Price
- $17.92
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 14 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $20.36 (13.6% Upside)
#3 - Chipotle Mexican Grill (NYSE:CMG)
One of the biggest comeback stories in the market has been Chipotle Mexican Grill (NYSE:CMG). The company that practically invented the “fast casual” category was written off more than once by investors as it endured first a food safety scandal and then concern over a data breach.
But the company has rebounded from both issues and appears to be stronger than ever. As evidence of this strength, just look at what’s happened to CMG stock in 2020. The company’s stock dropped approximately 50% at the onset of the pandemic mitigation efforts. Since then, it has recovered all of that loss and is now up over 20% for the year.
Two of the keys to the company’s current success are what brought it back from its previous trials. The company has a strong digital presence. Customers had already become accustomed to ordering from the app and picking up at the restaurant prior to the pandemic.
This meant that the “learning curve” for customers was non-existent. All that was required was loyalty. And that appears to have remained.
And although no plans are firm, Chipotle CFO Jack Hartung says the company is well-positioned to expand as rent is likely to be cheaper throughout the country.
About Chipotle Mexican Grill
Chipotle Mexican Grill, Inc, together with its subsidiaries, owns and operates Chipotle Mexican Grill restaurants. It sells food and beverages through offering burritos, burrito bowls, quesadillas, tacos, and salads. The company also provides delivery and related services its app and website. It has operations in the United States, Canada, France, Germany, and the United Kingdom.
Read More - Current Price
- $58.88
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 9 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $65.27 (10.9% Upside)
#4 - Domino's Pizza (NYSE:DPZ)
Normally my contrarian radar would be howling as I consider the idea that consumers will continue to order pizza when they can finally visit their favorite restaurants. But then I remembered that I have teenage children, and it simply makes sense. Pizza night is a staple for many families. And Domino’s Pizza (NYSE:DPZ) is a part of that culture.
DPZ stock is up approximately 28% in 2020 and nearly 35% in the last 12 months. This is an important consideration because, at the worst of the market selloff due to the pandemic, Domino’s stock remained positive for the year, and has continued on that trajectory.
That will be something for investors to consider when the company reports earnings in July. But for now, things look ideal for Domino’s. And the company even offers a small dividend which is no small feat when many companies have cut their dividends.
The stock is closing in on its 12-month price target, but analysts are still bullish on DPZ stock with expectations that it will continue to be a go-to dining out option as the economy recovers.
About Domino's Pizza
Domino's Pizza, Inc, through its subsidiaries, operates as a pizza company in the United States and internationally. The company operates through three segments: U.S. Stores, International Franchise, and Supply Chain. It offers pizzas under the Domino's brand name through company-owned and franchised stores.
Read More - Current Price
- $438.97
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 21 Buy Ratings, 8 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $494.38 (12.6% Upside)
#5 - Texas Roadhouse (NASDAQ:TXRH)
As we pivot away from fast food and fast-casual, Texas Roadhouse (NASDAQ:TXRH) is a name that’s worth your consideration. These were the restaurants that investors felt would have the hardest time making the switch from a dine-in to take-out offering. And let’s be clear, investors will be keenly interested in the company’s second-quarter earnings report due out in August to see how well the company performed. But very early returns from late March suggest the company may do better than expected.
For example, here’s one tidbit from the company’s first-quarter earnings report that supports the belief that consumers were buying into the new model. Weekly to-go sales jumped from $9 million at the beginning of March to nearly $42 million at the end of March.
It will be interesting to see if Americans retained their appetite for Texas Roadhouse as lockdown measures were extended. It’s possible that many consumers began to “spread the wealth” among chains. And that also doesn’t take into account that many Americans continued to lose their jobs during the lockdown.
However, Texas Roadhouse has already taken measures such as suspending its quarterly dividend to conserve cash. While this is generally not seen as a good thing by investors, in this case, it should allow the company a larger window in which to recover. The stock is essentially flat for the last 12 months.
About Texas Roadhouse
Texas Roadhouse, Inc, together with its subsidiaries, operates casual dining restaurants in the United States and internationally. It also operates and franchises restaurants under the Texas Roadhouse, Bubba's 33, and Jaggers names in 49 states and ten internationally. Texas Roadhouse, Inc was founded in 1993 and is based in Louisville, Kentucky.
- Current Price
- $193.41
- Consensus Rating
- Hold
- Ratings Breakdown
- 11 Buy Ratings, 12 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $189.00 (2.3% Downside)
#6 - Darden Restaurants (NYSE:DRI)
Will they or won’t they? That’s the question that faces investors who are considering buying Darden Restaurants (NYSE:DRI) stock. Darden is the parent company of the Olive Garden and Longhorn Steakhouse chains. The company had a surge in its to-go business for both of those chains.
But all eyes are going to be watching to see what the consumer appetite will be, if any, for dining out. It won’t be business as usual for a while, investors understand that. But chains like Olive Garden are the ones that stand to be hurt the most from a start-stop model. There is also some concern that any traffic they receive from customers returning to the restaurant will offset the gains they’ve made in to-go orders.
And that is really the story of the company’s upcoming earnings report. The results for the last quarter will be bad. But investors will be keen to hear what the company’s outlook is for future growth.
DRI stock is up over 100% since March, but it still remains down about 30% for the year and about the same over the last 12 months.
About Darden Restaurants
Darden Restaurants, Inc, together with its subsidiaries, owns and operates full-service restaurants in the United States and Canada. It operates under Olive Garden, LongHorn Steakhouse, Cheddar's Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V's Prime Seafood, and Capital Burger brand names.
Read More - Current Price
- $162.59
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 16 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $180.13 (10.8% Upside)
#7 - Starbucks (NASDAQ:SBUX)
Last but not least, I find it impossible to bet against Starbucks (NASDAQ:SBUX). The company hasn’t had an easy go of it. Starbucks had heavy exposure in China and the stock plunged when the novel coronavirus first broke out in China.
But those sales are starting to recover. While some of this is helped by the misfortune of Luckin Coffee (NASDAQ:LK), Starbucks won’t need much momentum to turn things around. Or at least that’s the hope. From what I can see, demand for the company’s products is as strong as ever.
That’s been a sneaky truth about the lockdown period. Consumers showed solidarity for the decisions that governments made, but it doesn’t mean they have abandoned their love for Starbucks. It has become a very quality defensive stock.
I’ll admit, the stock may be a little expensive with a P/E ratio just north of 27 and a price/sales ratio of 3.4. The stock has shown that it has support at $70 and there’s nothing to believe that it will fall below that. But the company reports earnings in late July. If you’re on the fence about the stock that may be a good time to check back in and see if there is a clearer direction on the stock’s overall trend.
About Starbucks
Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of coffee worldwide. The company operates through three segments: North America, International, and Channel Development. Its stores offer coffee and tea beverages, roasted whole beans and ground coffees, single serve products, and ready-to-drink beverages; and various food products, such as pastries, breakfast sandwiches, and lunch items.
Read More - Current Price
- $98.26
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 8 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $102.81 (4.6% Upside)
What was the first restaurant you dined in at after the pandemic ended? That will be a decision burned in the brain of many consumers who have seen their desire for restaurant food limited to take-out or delivery options.
And there is some question as to whether or not demand will return. But hear me out. I think the lockdown is just exposing an already emerging trend. There is a generation of consumers that really don’t like going out to eat. They are willing to pay a delivery fee to have even fast food delivered to them.
But the lockdown measures brought on by the pandemic have revealed that many of these same customers may have now realized they can get some of their dine-in favorites also available via curbside delivery. That’s good for them, but not so good for the restaurants.
And that’s why restaurant stocks are looking to be one of the most intriguing stories for the rest of 2020. If only 50% of the pent-up demand is directed at these companies, there should be a tremendous opportunity for investors. But even if customer traffic doesn’t come back quite as readily, there are a number of chains that are well-positioned to handle this new reality.
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