Despite macroeconomic challenges, the restaurant industry is well-positioned for growth due to easing inflation, increased consumer spending, and rapid digitization.
Therefore, quality restaurant stocks McDonald’s Corporation (MCD), Arcos Dorados Holdings Inc. (ARCO), and Potbelly Corporation (PBPB) could be wise additions to your portfolio now.
The Restaurant Performance Index (RPI) of the National Restaurant Association increased slightly in June, reaching 100.2, up 0.6% from May’s 99.6.
Also, according to the National Restaurant Association’s 2023 State of the Restaurant Industry study, the food service industry is forecast to reach $997 billion in revenues in 2023, with a projected rise of 500,000 jobs, despite high food costs and increased competition.
The global fast food and quick service restaurant market is predicted to grow at a 6.1% CAGR to $371.47 billion by 2027.
In addition, restaurant industry is adopting advanced technologies. Ryan Andrews, a marketing expert at Eat App, said, “Automation is the key to unlocking the full potential of restaurant marketing. By leveraging advanced technologies and tools, restaurants can effectively reach their target audience with personalized and timely messages, resulting in higher customer engagement and increased revenue.”
Moreover, restaurants in the United States are using AI-powered analytics tools to transform customer behavior and preferences. AI-based technology has the potential to improve user experiences, eliminate human error, and save operating expenses. Almost half of hotel businesses intend to use automation technologies, and AI in the near term.
Let’s delve deeper into the fundamentals of the featured stocks.
McDonald’s Corporation (MCD)
MCD operates and franchises its restaurants in the United States and internationally. The company’s segments include the United States (U.S.); International Operated Markets (IOM); and International Developmental Licensed Markets & Corporate (IDL).
MCD’s trailing-12-month ROTA of 15.38% is 313.2% higher than the industry average of 3.72%. Its trailing-12-month EBIT margin of 45.89% is 526.3% higher than the industry average of 7.33%.
For the second quarter ended June 30, 2023, MCD’s revenues 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.
Also, its EPS came in at $3.15, representing an increase of 96.9% year-over-year. The company’s operating income increased 81.3% year-over-year to $3.10 billion.
Analysts expect MCD’s revenue to increase 9.7% year-over-year to $25.42 billion for the year ending December 2023. Its EPS is expected to grow 14.3% year-over-year to $11.54 in 2023. It surpassed EPS estimates in all four trailing quarters. MCD’s stock has gained 10.9% over the past year to close its last trading session at $289.62.
MCD’s POWR Ratings reflect this promising outlook. The stock 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.
MCD has an A grade for Quality and a B grade for Momentum, Sentiment, and Stability. Within the B-rated Restaurants industry, it is ranked #6 out of 44 stocks. Click here for the additional POWR Ratings for Growth and Value MCD.
Arcos Dorados Holdings Inc. (ARCO)
ARCO operates as a franchisee of McDonald’s, one of the most popular fast-food chain restaurants worldwide. It has the exclusive right to own, operate, and grant franchises of McDonald’s restaurants in 20 countries and territories in Latin America and the Caribbean.
ARCO’s forward EV/Sales of 0.88x is 26.3% lower than the industry average of 1.20x. Its forward Price/Sales of 0.55x is 38.4% lower than the industry average of 0.90x.
ARCO’s trailing-12-month ROCE of 51.76% is 392.7% higher than the industry average of 10.49%. Its trailing-12-month ROTA of 5.67% is 50.2% higher than the industry average of 3.78%.
ARCO’s total revenues increased 25.3% year-over-year to $990.79 million for the first quarter that ended March 31, 2023, while its operating income rose 37.1% from the year-ago value to $66.29 million.
The company’s net income and EPS improved 52.8% and 50% from the prior-year quarter to $37.64 million and $0.18, respectively. In addition, its adjusted EBITDA grew 28% from the year-ago value to $100.50 million.
Street expects ARCO’s revenue to increase 14% year-over-year to $4.13 billion for the year ending December 31, 2023. Its EPS is expected to grow 6.5% year-over-year to $0.71 for the same period. It surpassed EPS estimates in three of four trailing quarters. Over the past nine months, the stock has gained 46.9% to close the last trading session at $10.80.
ARCO’s POWR Ratings reflect strong prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It has an A grade for Sentiment and a B grade for Growth, Value, and Momentum. It is ranked #3 in the same industry.
Beyond what is stated above, we’ve also rated ARCO for Stability and Quality. Get all ARCO ratings here.
Potbelly Corporation (PBPB)
PBPB and its subsidiaries, owns, operates, and franchises Potbelly sandwich shops in the United States.
PBPB’s forward EV/Sales of 0.93x is 22.3% lower than the industry average of 1.20x. Its forward Price/Sales multiple of 0.56 is 37.6% lower than the industry average of 0.90.
PBPB’s trailing-12-month ROTA of 4.36x is 15.4% higher than the 3.78x industry average. Its trailing-12-month asset turnover ratio of 1.91% is 91.9% higher than the 1% industry average.
For the fiscal first quarter ended March 26, 2023, PBPB’s total revenues increased 20.4% year-over-year to $118.27 million. Its non-GAAP net profit came in at $0.60 million, compared to a non-GAAP net loss of $4.40 million in the prior year. Also, its non-GAAP EPS amounted to $0.02, compared to a non-GAAP loss per share of $0.16 in the same quarter.
PBPB’s revenue is expected to increase 7.8% year-over-year to $487.10 million for the quarter ending September 2023. Its EPS is expected to come in at $0.19 for the same quarter. Over the past nine months, the stock has gained 82.4% to close the last trading session at $9.34.
PBPB’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #4 in the same industry. It has an A grade for Growth and a B for Value and Momentum. To see additional PBPB’s rating for Stability, Sentiment and Quality, click here.
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MCD shares were trading at $290.61 per share on Thursday morning, up $0.99 (+0.34%). Year-to-date, MCD has gained 11.50%, versus a 18.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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