The prospects for restaurant stocks cannot be separated from the pandemic and the path toward recovery.
All restaurants, from independents to chains to franchises saw sales and earnings decline in the midst of the COVID-19 pandemic. And now, with a recovery at hand, halting as it may be, the restaurant industry represents opportunities for stock pickers.
The winners will be those restaurants with strong brands that can bring customers back, as well as those who have done the best job bulking up alternative channels such as delivery, curbside, digital and drive-through.
Alternative channels are critical, as many of the consumer behaviors adopted during the pandemic, and it looks like they are here to stay.
Read on as we look at five of the best restaurant stocks to buy amid the global recovery.
Data is as of March 31.
- Market value: $40.3 billion
- Dividend yield: N/A
Sometimes the search for the best restaurant stocks leaves out the most important ingredient. That is, a great restaurant company needs to offer great food – and here, Chipotle Mexican Grill (CMG) excels.
Absent an authentic Mexican restaurant in your neighborhood, Chipotle is your best bet.
With 2,750 restaurants in the U.S. Canada and Europe, 200 more on the drawing board, a strong balance sheet, no debt and a $600 million cash hoard, Chipotle is well-positioned to reap the rewards of an economic recovery that may hit restaurants as hard on the upside as it did on the downside.
Further, new distribution channels that were necessitated by the pandemic are likely to stay in place and may offer Chipotle the opportunity to accelerate its sales. For instance, digital sales, which accounted for 49% of fourth-quarter sales, grew more than 170% last year. Other forms of distribution include drive-through, curbside pick-up, and an experimental digital kitchen for pick-up and delivery orders only.
Finally, it's worth noting that Chipotle was spun off from McDonald's (MCD) and some of McDonald's management principles seem to be in Chipotle's genes too – namely clean, efficient restaurants, a focus on quality, and perhaps most importantly, a willingness to innovate.
Yum China Holdings
- Market value: $24.9 billion
- Dividend yield: 0.8%
Yum China Holdings (YUMC) was spun off from Louisville, Kentucky-based Yum Brands (YUM) in November 2016. Today, Yum Brands China is the exclusive operator of iconic KFC, Taco Bell and Pizza Hut in that country.
While many investors like the American company post-spinoff, other investors think the mainland China operator is among the best restaurant stocks to buy. That's not just because of its three powerful American brands, but also its Little Sheep, Huang Ji Huang, COFFii & JOY and East Dawning restaurants.
Yum China has delivered solid, if not spectacular, sales and earnings growth since 2016 with average annual increases of about 5% each year, though there was a decline between 2018 and 2019. Further, the company got off to 2021 with a hiccup as covid breakouts amid the Chinese New Year holiday will likely dampen first-quarter results.
Still, Yum China is a behemoth, and growing. The company opened 1,165 restaurants in 2020 despite the pandemic, bringing its total to 10,500, and is targeting 1,000 more openings this year. Following shorter-term disruptions, Yum China is poised to hit its stride as China gets back to business post-pandemic, and as the company tightens its grip on operations and wrings more profit out of the top line.
There could be an additional tailwind for Yum China. Even if the Chinese economy comes close to the projected 8.2% GDP growth for 2021, it will offer hard and soft drivers for the country's restaurant section, for which Yum China is the largest player.
With a nice little cash hoard of about $4.3 billion, no long-term debt, and a debt-to-equity ratio of just 0.68x, Yum China, is well-positioned to fund expansion and capitalize on GDP growth.
Papa John's International
- Market value: $2.9 billion
- Dividend yield: 1.0%
Papa John's International (PZZA) operates and or franchises 5,400 pizza restaurants and competes among the four horsemen of the pizza business, which also include Domino's (DPZ), Pizza Hut and Little Caesars.
While a lot of restaurant chains have been figuring out digital channels amid the pandemic, Papa John's introduced digital ordering across all of its delivery restaurants in 2001 and has a huge head start. Today, more than 60% of its domestic sales were placed through digital channels.
So, while chains with an emphasis on indoor dining have suffered, Papa John's finished 2020 with a flourish with total sales up 12%, earnings swung to $1.28 per share from a loss the prior years, and in North America, same store sales up a hefty 17.6%. Meanwhile, Papa John's is picking up the pace on expansion with a nearly 50-restaurant deal with an existing franchisee, though Domino's and Pizza Hut are more aggressively opening new restaurants.
But, to the degree consumer habit developed during the pandemic linger, Papa John's decades-long investment in technology will likely continue to pay off. Expect it to be one of the better restaurant stocks to buy for years to come.
Fiesta Restaurant Group
- Market value: $330.9 million
- Dividend yield: N/A
Fiesta Restaurant Group (FRGI) shares troughed out in March as pandemic-related fears pushed down all restaurant stocks facing an uncertain future.
The big news at Fiesta is the speed with which the company was able to pivot in a pandemic-laden restaurant environment. Fiesta shifted "counter" sales to other channels, most notably drive-through. Online and delivery made impressive gains, but off of small numbers, each accounting for less than 10% of sales. Still, sales contracted 16% and Fiesta lost $0.40 per share last year.
Fiesta operates 167 Pollo Tropical restaurants (of which 29 are franchised) and 143 Taco Cabana brands concentrated in Florida and Texas, respectively. Optimism is being driven by recovery, as well as the investments the company has made in digital delivery to meet it.
Also on investors' minds is a new law in Texas allowing the company to sell alcohol through its drive-thru windows during takeout, offering a potentially large boost to its Taco Cabana brand. And of course, reopening will act as a catalyst for its primarily Florida-based Taco Cabana restaurants, though this is a tide that will lift all boats.
Although Fiesta is small at just $330 million in market capitalization, it has a decent balance sheet with just $42 million in debt, which is just a third of its equity. And while the company posted a loss of 41 cents per share last year, Value Line points out that Fiesta nonetheless generated about $1.00 per share in cash flow.
- Market value: $873.9 million
- Dividend yield: N/A
Chuy's Holdings (CHUY) stands out in the full-service category as the anti-chain restaurant. Each Chuy's location serves Tex-Mex dishes in a unique, though branded setting. This offers an added advantage in that Chuy's can test the impact of several incremental changes at one time.
Chuy's competes largely on price, with an average check of $15.74, which is lower than competitors Chili's, Olive Garden, LongHorn Steakhouse, and Cheesecake Factory (CAKE), among others. In some ways, Chuy's pricing competes with quick-service restaurants such as Chipotle, since many of the extras Chipotle charges for, Chuy's offers for free.
Chuy's was hit hard by the pandemic; total and comparable sales were both off significantly, and the company absorbed a net loss. But the stock has been buoyant, rising 67% through the first quarter. Green shoots in comparable-store sales, and a concentration of restaurants in Texas (more than 40%), where reopening restrictions are lower, has set expectations that traffic will be higher.
The company appears prepared to meet this new demand and capitalize on what might be ingrained consumer behavior for alternative ordering methods, with beefed-up curbside and delivery and higher pricing in those channels. Year-over-year curbside and delivery contributed 33% of total sales, almost double from the previous year.
Chuy's management appears conservative. The company has no debt, and after a pandemic-driven pause, it plans to open four to six new ones in 2020. A steady pace will provide a lift to earnings, but at the same time is unlikely to destabilize the company. That might not be as exciting as the other names on the list, but it still puts CHUY among the best restaurant stocks to buy.
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