Omicron is tearing through the population at a staggering rate, but there is an upside.
The coronavirus variant is milder and on its way out of the United States faster than delta.
If this is the case, it will promote the “reopening” of games on the stock exchange. Especially restaurants, as people have been reluctant to spend time in enclosed spaces with others not wearing masks.
Besides this factor, here are five reasons why restaurant stocks look attractive, according to analysts at Bank of America. Below, I single out five restaurant stocks to consider.
1. Restaurants benefit from job and income growth
As people earn more, they opt for the convenience of dining out. This trend particularly benefits full-service restaurants as opposed to fast food and take-out. So I favored full-service restaurants when searching for names, selected below.
In 2019, the share of personal disposable income spent on restaurants was 5.2%. It’s currently 6% below that, at 4.9% of income. Returning to 2019 levels would add $60 billion to restaurant spending, or about 10% of restaurant spending in 2020, according to Bank of America.
2. The tailwinds of capacity reduction will continue
Unfortunately, around 10% of restaurants have had to close during the pandemic, especially small independent operators. It will take time to rebuild. After the 2008-2009 financial crisis, capacity didn’t fully rebound until 2012, according to Bank of America. This benefits survivors, especially those with aggressive growth plans to fill capacity. I therefore favored chains with major growth projects.
3. Grocery store food prices are rising faster than restaurant prices
This benefits restaurants, as they become relatively cheaper. Fast casual restaurants benefit the most from this gap, so I’ve favored them.
4. Inflation could peak right now
Supply chain and transportation issues are being resolved. This suggests that we have seen the worst of food and wage inflation. If so, this favors restaurants since their top two costs will decline faster than the overhead costs of other types of businesses.
5. Restaurants look cheap compared to the market
Restaurants are trading on average below their historical levels relative to the market. The relative price-to-earnings ratio of the S&P 500 Restaurants Index is below its historical average of 1.4 times the S&P 500 multiple, as you can see in this chart from Bank of America.
Shares to consider
To find the restaurants that could benefit the most from these trends, I looked for three things.
* Channels with good growth are trading the most below analyst price targets. McDonald’s MCD,
is a strong mark, but it’s trading just 7% below the analyst consensus price target of $280. It seems almost fully priced. My five favorites, below, are trading between 25% and 42% below consensus price targets.
* Chains with ambitious growth plans, since they are the ones that will fill the voids caused by the mass restaurant closures.
* Chains offering seated meals. Foodservice restaurants were responsible for most of the industry’s decline in business in the Covid era, so they have more ground to catch up. Dutch Bros BROS,
is an exciting new coffee chain that went public in June. It is trading at a good 35% below analysts’ consensus price target. But it only works while driving. Thus, this will be less supported by the transition to the Covid epidemic.
Chipotle Mexican Grill
At a time when people value “authenticity” highly, Chipotle’s CMG,
“food with integrity” resonates. The mantra means that Chipotle strives to serve sustainably produced meat without added hormones or non-therapeutic antibiotics. Third-quarter sales increased 21.9% to $2 billion, and comparable restaurant sales increased 15%. Earnings per share rose 155% to $7.18 and operating margins nearly doubled.
In short, the channel is quite popular. So any increase in catering will help it more than other chains. The company also has plenty of room to grow. It says it will eventually double the number of 2,892 restaurants it had at the end of the third quarter. Chipotle is trading 25% below analyst consensus price target of $2,000.
Yum China Holdings
China is not shy about imposing lockdowns to slow the spread of Covid, especially ahead of the Winter Olympics scheduled for February. It hurts Yum China YUMC,
which operates KFC and Pizza Hut restaurants in China as well as other restaurant brands like Taco Bell, Little Sheep, Huang Ji Huang and East Dawning. But it also sets Yum China up for a huge sales rebound if Omicron truly marks the end of the pandemic.
Yum China has a lot of potential for expansion because its brands are so popular. KFC is the largest quick service restaurant brand and Pizza Hut is the largest casual restaurant brand in China, in terms of sales. Yum has been in China since 1987, so he understands how to grow there. In the third quarter, it added 524 stores bringing the number to 11,415 in more than 1,600 cities. Yum posted 9% sales growth in the third quarter, even though same-store sales fell 7% due to the delta variant. Yum China shares are trading 30% below analysts’ consensus price target of $68.50.
EAT of this company,
Chili’s Grill & Bar offers moderately priced classic American cuisine, including burgers, fajitas, and ribs.
Sales growth is at the bottom of the names listed here, at 5.5% in the third quarter compared to 2019. Its store opening plans are also quite modest – 15 to 21 outlets this year on an annual basis. ‘ around 1,650. But Brinker is worth considering as its stock is 27% below analysts’ consensus estimate of $51.90. As a lower-end restaurant, it should benefit more from revenue growth. Chiliheads paid $8 to $20 for entrees last year.
First Watch Restaurant Group
I always tell subscribers to my Brush Up on Stocks newsletter (link in bio below) to wait for initial public offerings (IPOs) to turn into canceled IPOs before buying. This means they are trading below their IPO price. This is what we have with First Watch Restaurant Group FWRG,
It went public at $18 in October last year and traded as high as $25.46 in the early days. But now you can buy it for less than $16.
Founded in 1987, First Watch specializes in serving fresh food for breakfast, brunch and lunch. His motto is “Yeah, it’s cool”. No microwave ovens, heat lamps or deep fryers here. Menu items include Quinoa Energy Bowl, Avocado Toast, and Kale Tonic Vodka. First Watch is aimed at younger, healthier and more affluent customers.
Before Omicron, growth was on fire. Comparable restaurant sales in the third quarter of 2021 were up 46.2% from 2020 and 19.7% from 2019. This gives you an idea of how fast the growth would be if the pandemic really turned into an epidemic. . The chain is small, with 428 restaurants at the end of the third quarter, suggesting plenty of room for rapid growth. It plans to open more than 130 company-owned restaurants through 2024. First Watch is trading 42% below the consensus price target of $26.20.
was almost halved from the high of $57.72 reached in the weeks following its release in October. This small fast-casual restaurant chain serves up iconic Chicago street food “designed to ignite the senses and create a memorable dining experience.” Launched in 1963 as a hot dog stand called The Dog House, Portillo’s has grown into a niche brand with a passionate following.
Third quarter same restaurant sales increased 6.8%. The chain is small with around 70 restaurants, which suggests there is room for a lot of growth. It plans to grow its number of outlets by 10% per year and eventually grow it tenfold to 600 in its core market of the Midwest and beyond. Portillo’s is trading 42% below the consensus price target of $51.30.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no position in the stocks mentioned in this column. Brush suggested MCD and CMG in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.