3 restaurant stocks to bet on despite industry headwinds

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The Zacks Retail – Restaurants segment has benefited for some time from gradually improving demand, robust off-site sales, sales development efforts and digital initiatives. However, the rising cost of employee salaries, benefits and insurance, as well as other operating costs, such as rent and traffic, continue to hurt businesses in the said space. Rising prices also affect industry traffic. However, Arcos Dorados Holdings Inc. ARCO, Portillo’s Inc. PTLO and Potbelly Corporation PBPB is well positioned to counter this scenario.

Description of the industry

The Zacks Retail – Restaurants industry includes several owners and operators of casual, upscale casual, fine dining, full-service and quick-casual restaurants. Some industry participants operate as specialty coffee roasters, marketers and retailers. Some companies develop, operate and franchise quick service restaurants around the world. A few restaurateurs offer cooked-to-order dishes, including noodles and pastas, soups, salads, and appetizers. Some industry players develop, own, operate, manage and license restaurants and lounges around the world. Some of the companies also operate technology-enabled Japanese restaurants in the United States, offering Japanese cuisine through a rotating sushi service model.

3 trends shaping the future of the restaurant industry

Traffic problems and high costs persist: The restaurant industry has been dealing with declining traffic for some time now. The pandemic has further worsened the scenario. A rapid increase in menu prices and the coronavirus pandemic are the main reasons for the traffic erosion. Restaurant owners are struggling with the high cost of operations. Intense competition, high wages and food price inflation remain concerns. The industry is constantly experiencing increased spending, which has recently affected margins. Rising pre-opening costs, marketing expenses and costs related to sales enhancement initiatives are weighing on margins. Rising costs for meat and seafood, including ribs, prime rib, rib eye and tri-tip, and salmon, are hurting the industry. According to the NPD Group, physical and online traffic fell 2% in the quarter from a year earlier. Quick-service restaurant traffic was down 3% year-over-year in the second quarter of 2022. Additionally, full-service restaurant traffic was down 3% year-over-year. other.

Digitization to stimulate growth: Restaurant owners’ focus on digital innovation, sales development initiatives and cost reduction efforts has been a catalyst for some time. With the growing influence of the Internet, digital innovation has become the need of the hour. Restaurant owners are constantly partnering with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, as well as the rollout of self-service kiosks and loyalty programs continue to drive growth. Restaurant owners are focusing on driverless delivery systems to boost sales amid the coronavirus crisis. This should significantly reduce expenses and ensure safety in the midst of the pandemic, as it eliminates the need to hire delivery staff.

Off-site sales, a key enabler: The industry consistently benefits from surging off-site sales, which primarily includes delivery, take-out, drive-thru, catering, meal kits, and off-site options, such as kiosks and food trucks , due to the coronavirus pandemic. According to the National Restaurant Association, more than 60% of restaurant food is consumed offsite. By 2025, offsite is expected to account for approximately 80% of industry growth. Most restaurateurs have started testing shadow or virtual kitchens. The idea of ​​providing offsite offerings with connected curbside service consistently garners positive customer feedback.

Zacks’ industry rankings point to bleak outlook

The Zacks Retail – Restaurants industry is grouped within the broader retail and wholesale sector.

The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a bleak short-term outlook. The Zacks Retail – Restaurant industry currently carries a Zacks industry ranking of #189, which places it in the bottom 25% of Zacks 252 industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1. As of January 31, 2022, industry earnings estimates for the year underway shifted 10.5% south.

Before outlining a few stocks you might want to consider for your portfolio, let’s take a look at recent industry stock performance and the valuation chart.

Industrials trail the S&P 500 but beat the sector

The Zacks Retail – Restaurants sector has underperformed the Zacks S&P 500 composite, but has outperformed its own sector over the past year.

During this period, the industry fell 18.8% compared to the 9.6% decline in the Zacks S&P 500 composite. Meanwhile, the sector fell 28.2%.

Year-over-year price performance

Restaurant industry rating

Based on the 12-month forward P/E ratio, a multiple commonly used to value restaurant stocks, the sector is currently trading at 24.2X compared to the S&P 500’s 17.32X. It is slightly lower than the price ratio. /sector 12-month forward earnings of 28.01X.

Over the past five years, the industry has traded as high as 34.57X and as low as 20.49X, with the median at 24.39X.

3 key restaurant choices

Arcos Dorados: Based in Montevideo, Uruguay, ARCO operates as a franchisee of McDonald’s restaurants. It is benefiting from a strong increase in comparable sales across the system and the opening of new restaurants.

Shares of this currently ranked No. 2 (buy) Zacks player gained 20.4% against an 18.6% industry decline. Arcos Dorados’ earnings for fiscal year 2022 are expected to increase by 83.3%. Over the past 90 days, the consensus rating for 2022 earnings has been revised up 10%. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Pricing and Consensus: ARCO

At Portillo: Based in Oak Brook, Illinois, Portillo’s continues to benefit from strong same-store sales and restaurant openings. PTLO enjoys higher average control, driven by an increase in menu prices and, to some extent, the mix of items sold.

Portillo’s earnings for fiscal 2022 are expected to improve 147.6% year-over-year. Over the past 30 days, the consensus rating for 2022 earnings has been revised up by 11.1%. Over the past three months, PTLO shares have gained 6.5% compared to the industry’s 3.5% increase. The stock is currently ranked Zacks No. 2.

Pricing and Consensus: PTLO

Belly: Based in Chicago, Illinois, Potbelly owns, operates and franchises Potbelly Sandwich Shops. PBPB benefits from strong same-store sales, strong digital channels and a strong loyalty program.

PBPB carries a Zacks rank of 2 at present. Zacks’ consensus estimate for Potbelly’s current-year sales and EPS suggests growth of 16.9% and 140%, respectively, over comparable prior-year numbers. Potbelly shares are down 28.9% over the past year.

Pricing and Consensus: PBPB

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Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report

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