Despite higher prices impacting consumer spending, the restaurant industry has maintained strong performance with steady sales growth. It is well-positioned for further expansion due to decreasing inflation, rapid digitization, evolving 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), Papa John’s International, Inc. (PZZA), and McDonald’s Corporation (MCD).
Before diving deeper into their fundamentals, let’s discuss why the restaurant industry is well-positioned for growth.
Since the pandemic, the restaurant industry has seen a surge in demand for online food delivery services, offering diverse cuisine options. Success will come to those who adapt to evolving consumer preferences.
The restaurant industry is expected to see robust growth in the near term due to the rising popularity of dining out, takeout, and delivery. Factors like resilient consumer spending, increased spending on dining experiences, the trend toward experience-based dining, and greater adoption of digital technology to meet evolving customer preferences are driving this growth.
The National Restaurant Association (NRA) anticipates ongoing consumer visits to restaurants, projecting that the U.S. restaurant industry will achieve $997 billion in sales in 2023.
The restaurant industry's strength is evident as eating and drinking places reported total sales of $90.80 billion in August. Additionally, August sales were 0.3% higher than July's revised figure of $90.50 billion, according to preliminary data from the U.S. Census Bureau.
Furthermore, digital technology is reshaping the restaurant industry, cutting costs, improving efficiency, and enhancing customer experiences with AI, cloud solutions, self-service options like kiosks, and online delivery, alongside ongoing partnerships with food delivery aggregators.
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 20, 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.
Its annual dividend of $2.28 yields 2.46% on prevailing prices. The company’s dividend payouts have grown at CAGRs of 8.9% and 11% over the past three and five years, respectively.
In terms of the trailing-12-month EBITDA margin, SBUX’s 18.58% is 70% higher than the 10.93% 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.
For the quarter ended September 30, 2023, EPS and revenue are expected to increase 20% and 10.4% 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 6.5% to close the last trading session at $92.68.
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 #12 out of 44 stocks in the B-rated Restaurants industry. To see SBUX’s Growth, Value, Momentum, and Sentiment ratings, click here.
Stock #2: Papa John’s International, Inc. (PZZA)
PZZA operates and franchises pizza delivery and carryout restaurants under the Papa John's trademark internationally. It operates through four segments: Domestic Company-Owned Restaurants; North America Commissaries; North America Franchising; and International Operations.
On August 22, PZZA announced the launch of its new Garlic Epic Stuffed Crust pizza, available at all PZZA’s Canada locations. They also introduced a spicy version called the Spicy Garlic Epic Stuffed Crust, along with other menu innovations this year.
PZZA’s Senior Vice President of Menu Strategy and Product Innovation Kimberly Bean predicted that Garlic Epic Stuffed Crust Pizza would spotlight the love for Special Garlic Sauce, take garlic to the next level, and deliver two fan favorites in one ultimate stuffed crust pizza.
On June 5, PZZA announced the acquisition of 91 restaurants previously operated by the M25 division of Drake Food Service International (DFSI) in the United Kingdom, establishing a portfolio of Company-owned restaurants. This is expected to bolster the company’s operative capacity.
In terms of the trailing-12-month Return on Total Capital, PZZA’s 17.43% is 186.8% higher than the 6.08% industry average. Likewise, its 8.24% trailing-12-month Return on Total Assets is 114% higher than the 3.85% industry average. Additionally, its 2.43x trailing-12-month asset turnover ratio is 143.7% higher than the 1x industry average.
For the fiscal second quarter ended June 25, 2023, PZZA’s total revenues came in at $514.53 million. Its adjusted operating income came in at $36.88 million. The company’s adjusted net income attributable to common shareholders came in at $19.29 million. Also, adjusted earnings per common share came in at $0.59.
Street expects PZZA’s EPS and revenue for the quarter ended September 30, 2023, to increase 4.8% and 4% year-over-year to $0.57 and $530.90 million, respectively. Over the past year, the stock has gained 8.2% to close the last trading session at $63.03.
PZZA’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 #6 in the same industry. It has a B grade for Growth and Quality. Click here to see PZZA’s Value, Momentum, Stability, and Sentiment ratings.
Stock #1: McDonald’s Corporation (MCD)
MCD operates and franchises its restaurants in the United States and internationally. The company's restaurants offer hamburgers and cheeseburgers, chicken sandwiches and nuggets, fries, salads, shakes, frozen desserts, sundaes, soft serve cones, bakery items, soft drinks, coffee, and beverages and other beverages, as well as a breakfast menu.
On October 4, MCD announced a quarterly cash dividend of $1.67 per share of common stock, payable to shareholders on December 15, 2023, reflecting a 10% increase over the company’s prior quarterly dividend.
MCD’s annual dividend of $6.68 yields 2.67% on current prices. Its dividends have grown at a CAGR of 6.7% over the past three years and a CAGR of 8.5% over the past five years.
In terms of the trailing-12-month net income margin, MCD’s 33.06% is 652.1% higher than the 4.40% industry average. Likewise, its 45.89% trailing-12-month EBIT margin is 523.6% higher than the 7.36% industry average. Additionally, its 24.75% trailing-12-month levered FCF margin is 385.4% higher than the 5.10% industry average.
MCD’s revenues for the fiscal second quarter that ended June 30, 2023, increased 13.6% year-over-year to $6.50 billion. Its net income rose 94.5% over the prior-year quarter to $2.31 billion. The company’s operating income for the period increased 81.3% year-over-year to $3.10 billion. Also, the company's net earnings per share came in at $3.15, representing an increase of 96.9% year-over-year.
Analysts expect MCD’s EPS and revenue for the quarter ended September 30, 2023, to increase 11.3% and 11.4% year-over-year to $2.98 and $6.54 billion, respectively. It surpassed the consensus EPS estimates in each of the four trailing quarters. Over the past year, the stock has gained 7.2% to close the last trading session at $249.92.
MCD’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #5 in the Restaurants industry. It has an A grade for Quality and a B for Stability and Sentiment. To see MCD’s Growth, Value, and Momentum ratings, click here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
MCD shares were trading at $252.50 per share on Tuesday morning, up $2.58 (+1.03%). Year-to-date, MCD has declined -2.60%, versus a 15.10% 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.
3 Restaurant Stocks Yelling 'BUY' This Month StockNews.com
