Restaurants increase convenience and give many people a place to unwind. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. These factors have weighed on the industry over the past six months as its 5% return has fallen short of the S&P 500’s 25.5% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here are two restaurant stocks boasting durable advantages and one we’re steering clear of.
One Restaurant Stock to Sell:
First Watch (FWRG)
Market Cap: $1.07 billion
Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ: FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.
Why Does FWRG Worry Us?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
First Watch’s stock price of $17.92 implies a valuation ratio of 53.8x forward P/E. Check out our free in-depth research report to learn more about why FWRG doesn’t pass our bar.
Two Restaurant Stocks to Watch:
Chipotle (CMG)
Market Cap: $56 billion
Born from a desire to offer quick meals with fresh, flavorful ingredients, Chipotle (NYSE: CMG) is a fast-food chain known for its healthy, Mexican-inspired cuisine and customizable dishes.
Why Are We Backing CMG?
- Fast expansion of new restaurants to reach markets with few or no locations is justified by its same-store sales growth
- Same-store sales growth averaged 4.8% over the past two years, showing it’s bringing new and repeat diners into its restaurants
- Massive revenue base of $11.58 billion makes it a household name that influences purchasing decisions
At $41.60 per share, Chipotle trades at 32.6x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free for active Edge members.
Yum! Brands (YUM)
Market Cap: $39.79 billion
Spun off as an independent company from PepsiCo, Yum! Brands (NYSE: YUM) is a multinational corporation that owns KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill.
Why Are We Fans of YUM?
- Aggressive expansion of new stores reflects an offensive push to quickly grow and sell in markets where it has few or no locations
- Excellent operating margin of 31.9% highlights the efficiency of its business model
- YUM is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Yum! Brands is trading at $142.40 per share, or 23x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free for active Edge members.
Stocks We Like Even More
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