According to the National Restaurant Association, the U.S. restaurant industry registered total sales of $85 billion in May, which is 0.7% higher than the previous month’s sales volume, even after facing price increases.
The Restaurant Performance Index (RPI), which tracks the health of the U.S. restaurant industry, came in at 102.6 for the same month, which is 0.5% higher than April’s level. Moreover, restaurant operators are optimistic about their future sales.
According to the Bureau of Labor Statistics, the cost of food-away-from-home rose 7.4% over the 12 months ended in May, but prices for food at home climbed even faster, shooting up 11.9%. Restaurant companies also expect people will dine out as long as grocery prices rise faster.
The Quick Service Restaurant (QSR) industry is forecasted to grow at an accelerated CAGR of 3.6% until 2025. North America is expected to generate 43% of the growth.
Given the promising prospects of the market, the fundamentally strong restaurant stocks Arcos Dorados Holdings Inc. (ARCO), Denny's Corporation (DENN), and Good Times Restaurants Inc. (GTIM) might be solid additions to one’s portfolio.
Arcos Dorados Holdings Inc. (ARCO)
ARCO, based in Montevideo, Uruguay, operates as a McDonald's Corporation (MCD) restaurant franchisee. The company possesses the exclusive right to own, use, and grant franchises of McDonald’s restaurants in Latin America and the Caribbean.
In May, ARCO announced its intent to redeem $123 million of its outstanding 6.625% senior notes due 2023. Earlier in April, the company announced the pricing of a $350 million aggregate principal amount of 6.125% Sustainability-Linked Senior Notes due 2029. The proceeds from the offering were intended to be used by the company to fund tender offers and for general corporate purposes.
In terms of its forward Price/Sales, ARCO is trading at 0.46x, 44.6% lower than the industry average of 0.84x. Its forward EV/Sales multiple of 0.89 is 11.4% lower than the industry average of 1.01.
ARCO’s total revenues increased 40.9% year-over-year to $790.68 million in the first quarter ended March 31. Its adjusted EBITDA grew 228% from the year-ago value to $78.50 million, while its net income improved 183% year-over-year to $24.63 million.
The company’s EPS increased 185.7% from the same period last year to $0.12. ARCO’s net income has grown at a CAGR of 27.2%, and its EPS at a CAGR of 27.7% over the past three years.
The consensus EPS estimate of $0.04 for the fiscal second quarter (ended June 2022) indicates a 118.7% improvement year-over-year. The consensus revenue estimate of $728.29 million for the same quarter reflects a 22.9% increase from the same period last year.
The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 13.1% over the past year and 18.5% year-to-date to close its last trading session at $6.91.
ARCO’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
ARCO is rated an A in Sentiment and a B in Growth and Value. Within the B-rated Restaurants industry, it is ranked #2 of 53 stocks.
To see additional POWR Ratings for Momentum, Stability, and Quality for ARCO, click here.
Denny's Corporation (DENN)
DENN operates full-service restaurant chains under Denny's brand. The company is the global owner of multiple franchised, licensed, and company restaurants.
In June, DENN announced its commitment to the Pathways to Black Franchise Ownership program created by the Multicultural Foodservice & Hospitality Alliance (MFHA). The company is expected to help MFHA reach its goal of creating 100 Black-owned franchises by 2023.
DENN’s forward P/E multiple of 11.61 is 2.4% lower than the industry average of 11.89.
In the first quarter ended March 30, DENN’s total operating revenue increased 28% year-over-year to $103.11 million. Its operating income grew 141.3% year-over-year to $13.31 million.
The company’s adjusted net income improved 1,448.6% from the prior-year quarter to $6.98 million, while adjusted net income per share was $0.11, up 1,000% year-over-year. DENN’s net income and EPS have grown at a CAGR of 15.8% over the past three years.
Analysts expect DENN’s revenue for the second quarter (ended June 2022) to be $112.43 million, indicating a 5.9% year-over-year growth. The company’s EPS for the same quarter is expected to be $0.14.
DENN’s stock has gained 4.5% intraday to close its last trading session at $9.07.
Under the POWR Ratings, DENN has a B grade for Growth, Value, and Quality. In the Restaurants industry, it is ranked #10.
Beyond what we’ve stated above, we have also given DENN grades for Momentum, Stability, and Sentiment. Get all the DENN ratings here.
Good Times Restaurants Inc. (GTIM)
GTIM engages in the U.S. restaurant business as the operator of upscale quick-service drive-through dining restaurant Good Times Burgers & Frozen Custard and full-service upscale casual dining restaurant Bad Daddy's Burger Bar.
In terms of its trailing-12-months PEG, GTIM is trading at 0.01x, 92.3% lower than the industry average of 0.14x. Its trailing-12-months P/E multiple of 2.77 is 75.3% lower than the industry average of 11.25.
For the second quarter ended March 29, GTIM’s total net revenue increased 15.1% to $33.60 million. This can be attributed to a rise of 15.1% from the prior-year quarter in restaurant sales to $33.36 million.
GTIM’s revenue has grown at a CAGR of 8.2% over the past three years, while its EBIT has increased at a CAGR of 242.2% over the same period. Its EBITDA has grown at a 26.2% CAGR over the past three years.
GTIM’s stock has declined 5.3% intraday to close its last trading session at $2.85.
GTIM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to Strong Buy in our POWR Rating system.
GTIM has an A grade for Value and a B for Growth, Momentum, Sentiment, and Quality. In the Restaurants industry, it is ranked #1. Click here to see the additional POWR Ratings for GTIM (Stability).
ARCO shares were trading at $6.41 per share on Tuesday afternoon, down $0.50 (-7.24%). Year-to-date, ARCO has gained 11.16%, versus a -18.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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