3 undervalued restaurant stocks to consider picking up

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The restaurant industry rebounded from the pandemic-induced setback. Franchised restaurants have weathered the pandemic and its recovery better. The fast food market is expected to reach $209.10 billion by 2027, growing at a CAGR of 10.6%.

According to the National Restaurant Association, restaurant sales have increased despite widespread price increases this year. Places to eat and drink generated total sales of $85 billion on a seasonally adjusted basis over the previous month.

Yelp Inc. (YAP) recently released its 2022 State of the Restaurant Industry Report, which shows a strong resumption of on-site restaurants and strong demand for take-out meals.

Given the favorable market outlook, fundamentally strong restaurant stocks Arcos Dorados Holdings Inc. (ARCO), Denny’s Corporation (DENN) and Good Times Restaurants Inc. (GTIM) could be solid buys. These stocks look undervalued at their current price level.

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 due 2023. In March, the company declared a dividend of $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.

In terms of price/sales futures, ARCO is trading at 0.48x, 44.4% below the industry average of 0.86x. Its EV/Futures multiple of 0.90 is 12% below the industry average of 1.02.

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. ARCO’s net profit 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 (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 past four quarters.

The stock has gained 13.5% over the past year and 21.3% since the start of the year to close its last trading session at $7.07.

ARCO POWR Rankings reflect this promising prospect. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. POWR ratings rate stocks on 118 different factors, each with its own weighting.

ARCO is rated A in Sentiment and B in Growth and Value. In category B Restaurants industry, it is ranked #2 out 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 the Denny’s brand through its subsidiary, Denny’s, Inc. The company has several franchise, licensed and corporate restaurants around the world.

DENN’s P/E multiple of 10.27 is 13.2% below the industry average of 11.82.

During the first quarter ended March 30, DENN’s total operating revenue increased 28% year-on-year to $103.11 million. Its operating profit rose 141.3% year-over-year to $13.31 million. The company’s adjusted net earnings improved 1,448.6% from the prior year quarter to $6.98 million, while adjusted net earnings per share were $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 (ending June 2022) to be $112.61 million, indicating 6.1% year-over-year growth. ‘other. The company’s EPS for the same quarter is expected to be $0.15.

DENN stock fell 1.6% intraday to close its last trading session at $8.78.

It’s no surprise that DENN has an overall rating of B, which translates to Buy in our POWR rating system. The stock has a B rating for growth, value and quality. In the restaurant industry, it is ranked #11.

Beyond what we’ve stated above, we’ve also given DENN ratings for Momentum, Stability, and Sentiment. Get all DENN notes here.

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.

In terms of the last 12 months PEG, GTIM is trading at 0.01x, which is 92% below the industry average of 0.13x. Its 12-month P/E multiple of 2.64 is 76.8% below the industry average of 11.37.

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 year-ago quarter in restaurant sales to $33.36 million. GTIM’s revenue grew at a CAGR of 8.2% over the past three years, while its EBIT grew at a CAGR of 242.2% over the same period. Its EBITDA has grown at a CAGR of 26.2% over the past three years.

GTIM stock gained slightly intraday to close its last trading session at $2.71.

GTIM’s strong fundamentals are reflected in its POWR ratings. The stock has an overall rating of A, which is equivalent to Strong Buy in our POWR rating system.

GTIM has an A rating for value and a B for growth, momentum, sentiment and quality. In the restaurant industry, it is ranked #1. Click here to see additional POWR ratings for GTIM (stability).


ARCO shares were trading at $6.94 per share on Wednesday afternoon, down $0.13 (-1.84%). Year-to-date, ARCO has gained 19.65%, compared to a -20.93% 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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