These 2 Restaurant Stocks Could Be Outperformers

It’s been a mixed year thus far for the Restaurant industry group, with several quick-service names rallying near all-time highs while casual dining names have struggled to stay in positive territory for the year.

The underperformance of the latter group can be attributed to weaker traffic trends in the casual dining space relative to quick-service.

This is not surprising given that we are seeing a pullback in spending from some consumers and quick-service is a trade-down option relative to casual dining, with consumers able to treat themselves with convenience with pizzas, burgers, and fries without breaking the bank at a casual dining restaurant where average checks are closer to $20.00.

However, while we’ve seen Yum Brands (YUM) and McDonald’s (MCD) continue to make new highs with both up 15% and 25% from their pre-COVID-19 highs, a couple of names remain well below their all-time highs and continue to trade at attractive valuations.

This is despite these two companies having iconic brands similar to McDonald’s, and KFC, Taco Bell, and Pizza Hut (Yum Brands), and despite them having some of the better growth profiles sector-wide.

In this update, we’ll dig into these two companies and highlight why they could be outperformers after a period of underperformance in Dominos Pizza’s (DPZ) case, and years of underperformance in the case of Restaurant Brands International (QSR).

Restaurant Brands International (QSR)

Restaurant Brands International is a $21.2 billion franchisor in the Restaurant industry group with four iconic brands under its umbrella: Burger King, Popeye’s Chicken, Firehouse Subs, and Tim Hortons.

The three latter brands were acquired by Restaurant Brands International over the past decade and they currently make up roughly one-third of its system-wide stores which are spread across over 100 countries.

The largest of its brands is Burger King with ~19,000 restaurants, with Tim Hortons just behind at ~5,600 restaurants, Popeye’s Chicken having ~4,000 restaurants, and Firehouse Subs, the smallest brand, having roughly 1,200 restaurants and operating solely in North America. Continue reading "These 2 Restaurant Stocks Could Be Outperformers"

MCD vs QSR: Which Is Healthier For Your Portfolio?

While the S&P-500 (SPY) and Nasdaq Composite (COMP) are on track for a significant losses this year, the Restaurant Sector has put together a solid performance, on track for just a 9% loss or an 1100 basis point outperformance vs. SPY.

This is despite starting off the year with a much worse performance, with the index briefly down 25% as of May, despite it trailing the S&P-500 and Nasdaq at the time.

The strong recovery in the sector can be attributed to the fact that inflation looks to have peaked, which is a huge benefit to restaurant margins.

Plus, valuations were already at their most attractive levels since March 2020 as of early 2022, with the index starting its bear market six months before the S&P 500 in July 2021.

Finally, while not all restaurant names are considered defensive, quite a few are lower-beta, pay attractive yields, and some benefit from a recessionary environment as they become trade-down beneficiaries.

In this update, we’ll look at two of the largest names in the sector and which looks like the better buy after this violent market-wide correction.

McDonald’s (MCD) and Burger King (QSR) have gone head to head for years from a competition standpoint regarding burger wars.

While McDonald’s has more than twice the number of restaurants globally and started out a decade earlier with Burger King being the copycat, there’s no clear consensus on the better restaurant operator among the two.

From strictly a same-store sales or wallet share standpoint in the United States, McDonald’s has been the undisputed leader, and Burger King has lagged over the past couple of years.

However, with similar prices, similar menus, and Burger King’s appearing to have more iconic fries while McDonald’s wins on burgers, it’s difficult to crown a leader.

That said, there are significant differences when it comes to investing in the brands, especially given that Burger King is just one piece of Restaurant Brands International’s portfolio, which also consists of Popeyes’s Louisiana Chicken, Tim Hortons, and the newly added Firehouse Subs.

In this article, we won’t try to answer the near-impossible question of which is the better burger chain, but we’ll highlight which stock looks healthier for one’s portfolio. Continue reading "MCD vs QSR: Which Is Healthier For Your Portfolio?"

2 Stocks to Play the Rebound in the Restaurant Sector

It’s been a solid quarter thus far for the AdvisorShares Restaurant ETF (EATZ) and the restaurant index as a whole, with the ETF and the index up 9% and 17%, respectively, thus far in Q4, a significant outperformance vs. the S&P-500 (SPY).

This outperformance can be attributed to the fact that many restaurant stocks were priced very attractively heading into Q4 after a violent 18-month bear market and because gas prices have been trending lower and inflation looks to have peaked, which both benefit restaurant brands.

The reason? Restaurant food traffic is sensitive to gas prices which impact discretionary budgets, and food costs and labor costs have been rising for two years, pinching the margins of many restaurant brands.

Unfortunately, while some names like Restaurant Brands Intl (QSR) are sitting at 52-week highs, others have remained under pressure, and Jack In The Box (JACK) and Dine Brands (DIN) are two examples of names that haven’t participated much in the recent rally. Given that both are well-run and trading at attractive valuations, I believe both make solid buy-the-dip candidates.

Jack In The Box (JACK)

Jack In The Box is a small-cap stock in the restaurant sector, with two brands, including Jack In The Box and Del Taco, after completing the $585MM acquisition earlier this year.

Unfortunately, the stock has lost over $300MM in market cap since the deal closed in March, with this attributed to weaker restaurant-level margins at both brands of 16.2% and 15.9%, respectively (Jack In The Box/Del Taco). At Jack In The Box, this represented a 390 basis point decline year-over-year, impacted by higher food, labor, electricity, and paper costs.

In the company’s most recent quarter (fiscal Q4), it reported revenue of $402.8MM, up 45% year-over-year, but this was largely due to the new contribution from Del Taco that made the results look much better.

Meanwhile, on a same-store sales basis, same-store sales were up just 4% at Jack In The Box and 5.2% at Del Taco in fiscal Q4, suggesting meaningful traffic declines when factoring in double-digit pricing.

This is not the end of the world, and the rest of the industry is also seeing traffic declines, but it is a little disappointing, given that the quick-service and fast-casual brands have been outperforming casual dining.

Hence, I expected a little stronger results from Jack In The Box. Continue reading "2 Stocks to Play the Rebound in the Restaurant Sector"

Restaurant Stocks: "David vs Goliath"

It’s been a rough year thus far for the restaurant industry, with a pullback in traffic, higher costs due to commodity/wage inflation, and a challenging environment for some companies from a traffic standpoint.

The result is that much of the group has become un-investable, and some names are looking worse by the month, including Red Robin (RRGB), which will post its third straight year of heavy net losses in FY2022.

Given this backdrop, the best strategy is to focus on the industry leaders and those with proven business models enjoying unit growth and still enjoying strong restaurant-level margins.

However, in a sector where there are still several names with these attributes, it’s tough to decipher which are the best to own. In this update, we’ll compare newly public restaurant operator First Watch (FWRG) with long-time franchiser Dominos Pizza (DPZ) and see which is the better name to own in the current environment.

Scale & Business Model

Dominos and First Watch are akin to David and Goliath from a scale standpoint, with Dominos being the largest pizza company globally with ~19,300 restaurants and First Watch being an emerging breakfast chain with ~450 restaurants.

The differences in the business model are also night and day, with Dominos being a 98% franchised model with a significant international footprint and First Watch being a primarily company-owned company model, with just 22% of its restaurants being franchised currently.

While Dominos’ operators have seen some headwinds due to elevated cheese prices and difficulty securing drivers from a margin standpoint, Dominos is more inflation-resistant than First Watch, given its franchised model where operators bear the brunt of higher costs.

The good news is that First Watch still has very respectable restaurant-level margins, even if they dipped 440 basis points in the most recent quarter. Besides, this margin erosion was largely due to a conservative pricing approach to maintain its value proposition. Plus, as its alcohol mix grows and it’s rolled out to 100% of the system, we could see some additional benefit from a margin standpoint.

That said, Dominos is the clear winner from strictly a margin standpoint, with 30% plus gross margins and double-digit operating margins vs. First Watch at 21% and 4%, respectively, on a trailing-twelve-month basis.

Domino’s Pizza - 1 / First Watch - 0 Continue reading "Restaurant Stocks: "David vs Goliath""

2 Restaurant Stocks In Undervalued Territory

It’s been a challenging year thus far for the restaurant industry, with dollars typically allocated to entertainment and a Friday night out wrestling to steal priority from rising gas bills, elevated energy costs, and higher mortgage rates.

Some restaurants have resorted to discounting to drive traffic, while others have relied on menu innovation and limited-time offers vs. promotional activities to protect their already softening margins.

FRED Personal Saving Rate

(Source: Twitter, ND Wealth Management, Steve Deppe)

Those brands that are the most out of touch have continued to raise prices at a double-digit pace to ensure they maintain margins, with Chipotle (CMG) being one such offender. While this is likely to protect margins in the interim and allow the company to meet earnings estimates, it could backfire over the medium-term, with loyal customers feeling taken advantage of after being hit with consistent menu price increases in a recessionary environment.

Although this has made it difficult to invest in the sector, a few names are doing a great job navigating the current environment, and following recent share price weakness, they’ve slipped into undervalued territory.

One is a new breakfast chain that’s bucking the negative traffic trends in the casual dining space and enjoying industry-leading retention due to a key competitive advantage. The other is a pizza chain that’s enjoying strong unit growth, and while it’s having a tough year, annual EPS is forecasted to hit new all-time highs in FY2023 and FY2024.

Let’s take a look below: Continue reading "2 Restaurant Stocks In Undervalued Territory"