Changing consumer preferences, increased dining out frequency, and the rise of food delivery services have propelled the restaurant industry’s growth following the pandemic-led setback. Moreover, owing to the industry’s resilience towards economic cycles, adding restaurant stocks to your portfolio could offer a hedge against uncertain economic conditions.
Given this backdrop, I have highlighted three restaurant stocks, Arcos Dorados Holdings Inc. (ARCO), Biglari Holdings Inc. (BH), and Nathan's Famous, Inc. (NATH), which seem to be well-positioned to see upsides, given their fundamental strength.
Despite rising commodity prices, Americans have remained undeterred from spending at restaurants. According to preliminary data from the U.S. Census Bureau, eating and drinking places registered total sales of $88 billion in May, indicating a 0.4% increase from April’s downward-revised volume of $87.70 billion. On top of it, consumer spending in restaurants witnessed an impressive 8% growth over the past 12 months.
In 2023, the food service industry is projected to achieve sales totaling $997 billion, with one contributing factor being the upward trend in menu prices owing to inflation.
Further, the demand for online food delivery services has experienced a significant boost post-pandemic, leading to the restaurant industry developing various strategies, such as cloud kitchens.
With a recorded value of $63 billion in 2021, the global cloud kitchen market is poised for remarkable growth. It is projected to reach a market size of $373.40 billion by 2030, exhibiting a robust CAGR of 22% through 2030. In addition, the global market of online food delivery services is expected to witness a CAGR of 18.7% through 2030.
Considering the industry’s innovative ways to adapt to consumer tastes and preferences and its resilience through economic cycles, investing in ARCO, BH, and NATH could boost your portfolio returns.
That said, let us evaluate the aforementioned stocks in detail:
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.
In terms of trailing-12-month ARCO’s ROCE and ROTA of 51.67% and 5.67% are 434% and 56.4% higher than the industry averages of 9.68% and 3.63%, respectively. Likewise, its trailing-12-month ROTC of 9.16% is 50.6% higher than the industry average of 6.08%.
ARCO’s total revenues increased 25.3% year-over-year to $990.79 million for the first quarter (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 and EPS for the second quarter (ending June 30, 2023) to increase 17.4% and 85.7% year-over-year to $1.04 billion and $0.13, respectively. Moreover, the company surpassed the revenue estimates in each of the trailing four quarters, which is impressive.
Additionally, its revenue and EBIT have grown at CAGRs of 10.3% and 31.5% over the past three years, respectively. Over the same period, its net income and EPS have also improved at CAGRs of 115.1% and 118.4%, respectively.
Over the past year, the stock has gained 49.9% to close the last trading session at $9.98. It is trading higher than its 50-day moving average of $8.74 and 200-day moving average of $8.01.
ARCO’s POWR Ratings reflect this robust outlook. The stock has an overall A rating, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Sentiment and a B for Growth, Value, and Momentum. In the 45-stock A-rated Restaurants industry, it is ranked #3. To see additional ratings of ARCO for Stability and Quality, click here.
Biglari Holdings Inc. (BH)
BH owns, operates, and franchises restaurants in the United States under the names of Steak n Shake and Western Sizzlin. The company also engages in underwriting commercial trucking insurance, selling physical damage and non-trucking liability insurance to truckers, and providing property and casualty insurance.
BH’s trailing-12-month EBITDA and net income margins of 23.63% and 8.89% are 121.9% and 112.3% higher than the industry averages of 10.65% and 4.19%, respectively. Likewise, its trailing-12-month CAPEX/Sales of 7.07% is 120.9% higher than the industry average of 3.20%.
In the first quarter that ended March 31, 2023, BH’s total revenues increased 5.6% year-over-year to $90.18 million, while its net earnings amounted to $65.54 million versus a net loss of $298 thousand in the same period last year.
Also, during the same period, its cash and cash equivalents and total current assets stood at $39.36 million and $163.36 million, up 5.1% and 8.4% compared to $37.47 million and $150.65 million as of December 31, 2022.
Its EBIT and tang book value has grown at CAGRs of 9.3% and 10.2% over the past three years, respectively, while its EBITDA has increased at a CAGR of 6.9% over the same period.
The stock has gained 64.7% over the past nine months to close the last trading session at $194.34. It is currently trading higher than its 100-day moving average of $181.62 and 200-day moving average of $159.92.
BH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Value, Momentum, Stability, and Quality. Within the same A-rated industry, it is ranked first. Click here to see BH’s rating for Sentiment.
Nathan's Famous, Inc. (NATH)
NATH owns and franchises restaurants under Nathan's Famous brand name and trademarks through various distribution channels. Also, the company has license agreements for manufacturing, distributing, marketing and selling its branded hot dogs, sausages, and corned beef products.
The stock’s trailing-12-month EBIT, net income, and levered FCF margins of 26.34%, 15%, and 12.36% are 263.8%,258.3%and 242.3% higher than the industry averages of 7.24%, 4.19%, and 3.61%, respectively. Also, its trailing-12-month ROTA of 33.48% compares to the industry average of 3.63%.
For the fourth quarter of fiscal 2023 that ended March 26, 2023, NATH’s total revenue increased 10.7% year-over-year to $27.41 million, while its income from operations grew 5.1% from the year-ago value to $6.42 million. The company’s net income improved 51.3% and 53.8% from the prior-year quarter to $3.27 million and $0.80 per share. Also, its adjusted EBITDA rose 10.6% from the year-ago value to $7.09 million.
Over the past three years, NATH’s revenue and net income have grown at CAGRs of 8.2% and 13.5%, respectively. Likewise, its levered FCF and EBIT have improved at CAGRs of 23% and 8.2% over the same period, respectively.
NATH’s shares have gained 35.1% over the past year to close the last trading session at $79.01, higher than its 50-day and 200-day moving averages of $74.68 and $70.91, respectively.
It’s no surprise that NATH has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Quality and a B for Growth, Momentum, and Sentiment. Out of 45 stocks in the same industry, it is ranked #2.
In addition to the POWR Ratings we’ve stated above, we also have NATH’s ratings for Value and Stability. Get all NATH ratings here.
What To Do Next?
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ARCO shares were trading at $10.20 per share on Friday afternoon, up $0.22 (+2.20%). Year-to-date, ARCO has gained 23.47%, versus a 16.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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