The restaurant industry is well-positioned for growth due to easing inflation, rapid digitization, sustained demand for upscale dining experiences, changing consumer preferences, and the growth of online delivery services.
Considering these factors, it could be wise to buy fundamentally strong restaurant stocks: Starbucks Corporation (SBUX), Potbelly Corporation (PBPB), and Biglari Holdings Inc. (BH).
Before diving deeper into their fundamentals, let’s discuss why the restaurant industry is well-positioned for growth.
This year, the restaurant industry is poised for strong growth as eating out and ordering food for takeout/delivery has become increasingly popular. The resilience in consumer spending, expenditure on dining experiences, and growing digital technology adoption to meet evolving customer preferences are some of the factors expected to drive this growth.
The strength of the restaurant industry can be gauged from the eating and drinking places registered total sales of $90.80 billion on a seasonally adjusted basis in August, rising 8.2% year-over-year. According to the preliminary data from the U.S. Census Bureau, August’s eating and drinking places registered total sales were 0.3% higher than July’s downward revised sales volume of $90.50 billion.
The National Restaurant Association (NRA) expects consumers to continue visiting restaurants in the coming months. NRA predicts that the U.S. restaurant industry will reach $997 billion in sales in 2023.
Furthermore, digital technology is reshaping the restaurant industry by helping lower costs, boosting efficiency, and improving customer experience through AI, cloud solutions, and self-service options like kiosks and online delivery. In addition, partnerships with food delivery aggregators are expected to keep driving growth.
The global foodservice market is expected to grow at a CAGR of 10.8%, reaching $5.42 trillion by 2030.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Restaurants picks, beginning with the third choice.
Stock #3: Starbucks Corporation (SBUX)
SBUX operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates through three segments: North America, International, and Channel Development.
On September 9, 2023, SBUX announced an increase in its quarterly cash dividend from $0.53 to $0.57 per share of outstanding Common Stock. This change is effective for the dividend payable on November 24, 2023, to shareholders of record on November 10, 2023, raising the annual dividend rate to $2.28 per share.
In terms of the trailing-12-month EBITDA margin, SBUX’s 18.58% is 68.3% higher than the 11.04% industry average. Likewise, its 10.80% trailing-12-month net income margin is 145.8% higher than the 4.40% industry average. Additionally, its 13.17% trailing-12-month Return on Total Assets is 242% higher than the 3.85% industry average.
SBUX’s total net revenues for the fiscal third quarter ended July 2, 2023, increased 12.5% year-over-year to $9.17 billion. Its non-GAAP operating income increased 15.9% from the year-ago value to $1.59 billion. The company’s attributable net earnings increased by 25.1% year-over-year to $1.14 billion. In addition, its non-GAAP EPS increased 19% year-over-year to $1.
Street expects SBUX’s EPS and revenue for the quarter ended September 30, 2023, to increase 20.3% and 10.5% year-over-year to $0.97 and $9.29 billion, respectively. It surpassed the consensus EPS estimates in three of the four trailing quarters. Over the past year, the stock has gained 3% to close the last trading session at $91.15.
SBUX’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Stability and Quality. It is ranked #10 out of 44 stocks in the B-rated Restaurants industry. To see SBUX’s Growth, Value, Momentum, and Sentiment ratings, click here.
Stock #2: Potbelly Corporation (PBPB)
PBPB and its subsidiaries own, operate, and franchise Potbelly sandwich shops in the United States. The company’s menu includes toasty hot sandwiches, salads, soups, chili, sides, desserts, and breakfast sandwiches.
On August 1, 2023, PBPB announced plans to open nearly 50 new locations in Florida through agreements with franchise groups in key regions, including Tampa, Orlando, Fort Myers, Broward County, Gainesville, and Panama City. This expansion aligns with the company's long-term goal of reaching 2,000 shops, focusing on franchising.
On July 19, 2023, PBPB announced a 27-shop agreement in Maryland with founder Bryant Keil and his son Hampden. This includes rights to develop 15 new PBPB shops and refranchise 12 existing locations in seven Maryland counties. The company aims to expand in Maryland and nationwide, part of its goal is to reach 2,000 shops, with at least 85% of those locations being franchised.
In terms of the trailing-12-month Return on Total Assets, PBPB’s 4.90% is 27.1% higher than the 3.85% industry average. Likewise, its 1.92x trailing-12-month asset turnover ratio is 91.4% higher than the 1x industry average.
For the fiscal second quarter ended June 25, 2023, PBPB’s total revenues increased 9.2% year-over-year to $126.62 million. Its adjusted net income attributable to PBPB rose 38.5% over the prior-year quarter to $2.03 million. The company’s adjusted net income per share attributable to PBPB rose 40% year-over-year to $0.07.
In addition, its adjusted EBITDA came in at $8.04 million, representing an increase of 38.6% year-over-year.
For the quarter ended September 30, 2023, PBPB’s revenue is expected to increase 3.2% year-over-year to $121.40 million. Its EPS for the fiscal year ending December 31, 2024, is expected to increase 119.1% year-over-year to $0.23. Over the past year, the stock has gained 57.3% to close the last trading session at $7.55.
PBPB’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #7 in the same industry. It has a B grade for Value and Stability. Click here to see PBPB’s Growth, Momentum, Sentiment, and Quality ratings.
Stock #1: Biglari Holdings Inc. (BH)
BH primarily operates and franchises restaurants in the United States. It owns, operates, and franchises restaurants under the Steak n Shake and Western Sizzlin names.
In terms of the trailing-12-month net income margin, BH’s 29.10% is 562% higher than the 4.40% industry average. Likewise, its 12.23% trailing-12-month Return on Total Assets is 217.8% higher than the 3.85% industry average. Additionally, its 6.38% trailing-12-month Capex/Sales is 98.52% higher than the 3.22% industry average.
BH’s total revenue for the fiscal second quarter that ended June 30, 2023, increased 1.3% year-over-year to $93.54 million. Its net earnings attributable to BH shareholders came in at $1.94 million, compared to a net loss of $73.78 million in the year-ago quarter.
Also, the company's net earnings per average equivalent Class A share came in at $6.64, compared to a loss per share of $244.37 in the year-ago quarter.
Over the past year, BH has gained 32.2% to close the last trading session at $164.05.
BH’s POWR Ratings reflect solid prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked first in the Restaurants industry. It has a B grade for Value, Stability, Sentiment, and Quality. To see BH’s Growth and Momentum ratings, click here.
What To Do Next?
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SBUX shares were trading at $92.75 per share on Thursday afternoon, up $1.60 (+1.76%). Year-to-date, SBUX has declined -5.06%, versus a 12.04% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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