2 restaurant stocks to buy, 2 to avoid


U.S. restaurant sales showed strong resilience last month. Restaurants and drinking places generated total sales of $85 billion, up 0.7% from Apriland marked the fourth straight monthly increase in consumer spending at restaurants and bars.

At-home food spending increased more than menu items at fast-casual and fast-casual restaurants. According to Nick Cole, head of restaurant finance at Mitsubishi UFJ Financial Group, this trend makes restaurants attractive.

Against this backdrop, fundamentally strong restaurant stocks Good Times Restaurants Inc. (GTIM) and Arcos Dorados Holdings Inc. (ARCO) could be solid investments.

On the other hand, restaurateurs remain concerned about rising food prices and labor shortages. Therefore, we believe that the fundamentally weak shares of Shake Shack Inc. (SHAKE) and Sweetgreen, Inc. (SG) is perhaps best avoided now.

Stocks to buy:

Good Times Restaurants Inc. (GTIM)

GTIM engages in the restaurant business in the United States as the operator of the upscale fast-food drive-thru restaurant Good Times Burgers & Frozen Custard and the upscale casual full-service restaurant Bad Daddy’s Burger Bar.

For the second quarter ended March 29, GTIM’s total net income increased 15.1% to $33.60 million. This can be attributed to a 15.1% increase over the prior year quarter in restaurant sales to $33.36 million, while its franchise revenue improved 18.3% from a year-over-year at $233,000.

GTIM stock has gained 13.7% in the past month and 10.6% in the past five days to close its last trading session at $2.98.

GTIM’s solid fundamentals are reflected in its POWR Rankings. The stock has an overall rating of A, which is equivalent to Strong Buy in our proprietary rating system. POWR ratings rate stocks on 118 different factors, each with its own weighting.

GTIM has an A rating for value and a B for growth, momentum, sentiment and quality. In category B Restaurants industry, it is ranked #1 out of 47 stocks.

Click here to see additional POWR ratings for GTIM (stability).

Arcos Dorados Holdings Inc. (ARCO)

ARCO, based in Montevideo, Uruguay, operates as a franchise restaurant of McDonald’s Corporation (MCD). The Company has the exclusive right to own, use and license McDonald’s restaurants in Latin America and the Caribbean.

In May, ARCO announced its intention to buy back $123 million of its outstanding 6.625% top grades maturity 2023. In March, the company declared $0.15 per share, payable to all Class A and Class B shareholders in four quarterly installments. This reflects the company’s earning capacity for shareholders.

ARCO’s total revenue increased 40.9% year-on-year to $790.68 million in the first quarter ended March 31. Its adjusted EBITDA increased 228% from the prior year’s value to $78.50 million, while its net profit improved 183% year-on-year. at $24.63 million. The company’s EPS increased 185.7% from the same period last year to $0.12.

The consensus EPS estimate of $0.04 for the fiscal second quarter (ending June 2022) indicates a 118.7% year-over-year improvement. The consensus revenue estimate of $728.29 million for the same quarter reflects a 22.9% increase over the same period last year. The company has an impressive track record of earnings surprises, as it beat consensus EPS estimates in each of the last four quarters.

The stock has gained 12.4% over the past year and 29.6% over the past six months 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. ARCO is rated A in Sentiment and B in Growth and Value. It is ranked #2 in the restaurant industry.

To see additional POWR ratings for Momentum, Stability, and Quality for ARCO, Click here.

Actions to avoid:

Shake Shack Inc. (SHAKE)

SHAK is the owner, operator and licensor of Shake Shack restaurants. The company’s offerings include burgers, hot dogs, chicken, shakes, beer, wine and other products.

In May, SHAK and licensee Maxim’s Caterers Limited announced the expansion of their partnership and plans to open 15 Shacks in Thailand by 2032. However, the gains from this expansion could be stretched out over a long period of time.

For the fiscal first quarter ended March 30, SHAK’s total expenses increased 32.1% year-over-year to $218.33 million. Net income and EPS of Class A common shares decreased by 2,062.1% and 2,700% compared to the prior year period to negative $11.28 million and an amount negative $0.26.

Analysts expect the company’s EPS to decline 395.7% year-over-year to negative $0.30 for fiscal 2022.

The stock is down 59.9% over the past year and 10.7% over the past month to close its last trading session at $42.20.

POWR ratings reflect SHAK’s bleak outlook. The stock has an overall rating of D, which is equivalent to Sell in our POWR rating system. SHAK has a growth, sentiment and quality rating of D. It is ranked #42 in the restaurant industry.

Click here to see additional POWR ratings for SHAK (Value, Momentum, and Stability).

Sweetgreen, Inc. (SG)

SG develops and operates restaurants serving healthy food made from seasonal and organic ingredients. The company also engages in activities such as accepting online orders and selling gift cards that can be redeemed at its restaurants.

In March, SG announced plans to open its first “sweetlane” concept in Schaumburg, Illinois sometime next year. Sweetlane customers should be able to place orders in advance through the company’s digital platform. However, the gains from this venture may take some time to materialize.

During the fiscal first quarter ended March 27, SG’s net loss increased 63.8% year-on-year to $49.20 million. Total operating expenses increased 95% from the prior year quarter to $62.87 million. The company’s EPS came in at negative $0.45.

Street expects SG’s EPS to be negative $0.18 in the quarter ending June 2022.

The stock is down 58.3% year-to-date and 29.4% over the past month to close its last trading session at $13.33.

These bleak outlooks are reflected in SG’s POWR ratings. The stock has an overall F rating, which equates to a strong sell in our proprietary rating system. SG has a D rating for Growth, Value, Stability, Sentiment and Quality. It is ranked #44 in the same industry.

In addition to the POWR ratings we listed above, we can see the SG ratings for Momentum here.

GTIM shares were trading at $3.09 per share on Monday afternoon, up $0.11 (+3.69%). Year-to-date, the GTIM is down -28.80%, compared to a -17.58% rise in the benchmark S&P 500 over 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. After…

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