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. Unfortunately, these factors have spelled trouble for the industry as it has shed 14.4% over the past six months. This performance is a stark contrast from the S&P 500’s 17.2% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Taking that into account, here is one restaurant stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Restaurant Stocks to Sell:
Brinker International (EAT)
Market Cap: $4.70 billion
Founded by Norman Brinker in Dallas, Brinker International (NYSE: EAT) is a casual restaurant chain that operates the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.
Why Are We Wary of EAT?
- Lack of new restaurants puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
- Estimated sales growth of 3.1% for the next 12 months implies demand will slow from its six-year trend
- Lacking pricing power results in an inferior gross margin of 17% that must be offset by turning more tables
Brinker International is trading at $105.70 per share, or 10.1x forward P/E. Read our free research report to see why you should think twice about including EAT in your portfolio.
The ONE Group (STKS)
Market Cap: $56.65 million
Doubling as a hospitality services provider for hotels and resorts, The One Group Hospitality (NASDAQ: STKS) is an upscale restaurant company that operates STK Steakhouse and Kona Grill.
Why Should You Dump STKS?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
The ONE Group’s stock price of $1.92 implies a valuation ratio of 4.1x forward P/E. If you’re considering STKS for your portfolio, see our FREE research report to learn more.
One Restaurant Stock to Buy:
Wingstop (WING)
Market Cap: $6.65 billion
The passion project of two chicken wing aficionados in Texas, Wingstop (NASDAQ: WING) is a popular fast-food chain known for its flavorful and crispy chicken wings offered in a variety of sauces and seasonings.
Why Do We Love WING?
- Customers are lining up to eat at its restaurants as the company’s same-store sales growth averaged 11.9% over the past two years
- Excellent operating margin of 25.7% highlights the efficiency of its business model
- Robust free cash flow margin of 15.9% gives it many options for capital deployment
At $239.08 per share, Wingstop trades at 53.4x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.
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