Despite macroeconomic challenges, the restaurant industry is well-positioned for growth due to easing inflation and rapid digitization. Therefore, quality restaurant stocks like Ark Restaurants Corp. (ARKR), Arcos Dorados Holdings Inc. (ARCO), and Potbelly Corporation (PBPB), trading cheaply under $20, could be solid buys right now.
But before we analyze the stock fundamentals, let us look at the industry landscape.
Restaurant sales rose for a sixth straight month in August. The U.S. Census Bureau reported that eating and drinking places registered total sales of $90.80 billion on a seasonally adjusted basis, up 0.3% from July’s downward-revised sales volume of $90.5 billion.
On top of it, the National Restaurant Association (NRA) believes that consumers should continue to visit restaurants in the upcoming months. Also, according to NRA’s 2023 State of the Restaurant Industry study, the U.S. restaurant industry is forecast to reach $997 billion in revenues in 2023.
Moreover, restaurants in the United States are using AI-powered tools to transform customer behavior and preferences. AI-based technology has the potential to improve user experiences, eliminate human error, and save operating expenses. Almost half of hotel businesses intend to use automation technologies and AI in the near term.
As the popularity of restaurants grows, the global foodservice market is projected to grow from $2.65 trillion in 2023 to $5.42 trillion by 2030, expanding at a CAGR of 10.8%.
Let’s delve deeper into the fundamentals of the featured Restaurants stocks starting with the third.
Stock #3: Ark Restaurants Corp. (ARKR)
ARKR owns and operates restaurants, bars, fast-food concepts, and catering services primarily in major cities and tourist destinations across the United States.
On August 8, ARKR declared a cash dividend of $0.1875 per share, which was payable to shareholders on September 12, 2023. Its annual dividend of $0.75 yields 4.93% on prevailing prices. Its dividend payouts have grown at a 7.7% CAGR over the past three years.
In terms of trailing-12-month Price/Sales, ARKR is trading at 0.29x, 65.3% lower than the industry average of 0.85x. Its trailing-12-month Price/Book multiple of 0.90 is 55.1% lower than the industry multiple of 2.01.
For the fiscal third quarter ended July 1, 2023, ARKR’s total revenues amounted to $51.05 million, while its operating income came in at $3.64 million.
Additionally, as of July 1, 2023, the company’s total liabilities stood at $124.04 million, down from $149.42 million as of October 1, 2022. For the 39 weeks ended July 1, the company’s net cash provided by investing activities increased significantly from the previous-year value to $2.01 million.
Its trailing-12-month asset turnover ratio of 1.01x is 1.5% higher than the 1.00x industry average. Its trailing-12-month cash per share of $3.88 is 60.2% higher than the $2.42 industry average.
The stock gained marginally intraday to close the last trading session at $15.32.
ARKR’s promising outlook is reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
It has an A grade for Value and a B for Momentum and Sentiment. It is ranked #20 in the B-rated 54-stock Restaurants industry. To see ARKR’s ratings for Growth, Stability, and Quality, click here.
Stock #2: Arcos Dorados Holdings Inc. (ARCO)
ARCO, based in Montevideo, Uruguay, operates as a franchisee of McDonald’s restaurants. It possesses the exclusive right to own, operate, and grant franchises of McDonald’s restaurants in Latin America and the Caribbean.
ARCO’s forward EV/Sales multiple of 0.83 is 26.9% lower than the industry average of 1.13. In terms of forward Price/Sales, it is trading at 0.48x, 42.8% lower than the 0.84x industry average.
ARCO’s trailing-12-month ROCE of 54.14% is 375.2% higher than the industry average of 11.39%. Its trailing-12-month ROTA of 5.96% is 54.9% higher than the industry average of 3.85%.
ARCO’s total revenues increased 17.2% year-over-year to $1.04 billion for the fiscal second quarter that ended June 30, 2023, while its operating income rose 23.5% from the year-ago value to $74.89 million.
The company’s net income and EPS improved 95.7% and 85.7% from the prior-year quarter to $28.53 million and $0.13, respectively. In addition, its adjusted EBITDA grew 20.5% from the year-ago value to $110.06 million.
Street expects ARCO’s revenue to increase 14.4% year-over-year to $4.14 billion for the fiscal year ending December 2023. Its EPS is expected to grow 6.6% year-over-year to $0.71 for the same period. It surpassed revenue estimates in each of the four trailing quarters and EPS estimates in three of the four trailing quarters.
Over the past year, the stock has gained 32.3% to close the last trading session at $9.42. Over the past six months, it has gained 25.1%.
ARCO’s POWR Ratings reflect its strong prospects. It has an overall rating of B, which translates to Buy in our proprietary rating system. It has a B grade for Value and Sentiment. It is ranked #10 in the same industry.
Beyond what is stated above, we’ve also rated ARCO for Growth, Momentum, Stability, and Quality. Get all ARCO ratings here.
Stock #1: Potbelly Corporation (PBPB)
PBPB and its subsidiaries own, operate, and franchise Potbelly sandwich shops in the United States. The company's menu includes toasty hot sandwiches, salads, soups, chili, sides, desserts, and breakfast sandwiches.
On August 1, PBPB announced that it is rapidly expanding in Florida with nearly 50 new locations in key regions, driven by multi-unit franchise agreements. This growth strategy strengthens PBPB's presence in the state and positions it for increased market share.
On July 19, PBPB announced that it had struck a 27-shop agreement in Maryland with founder Bryant Keil, allowing for the development of 15 new PBPB locations and refranchising 12 existing ones. This strategic move contributes to PBPB's goal of expanding its presence.
In terms of forward EV/Sales, PBPB is trading at 0.79x, 29.9% lower than the industry average of 1.13x. The stock’s forward Price/Sales multiple of 0.46 is 45.4% lower than the 0.84 industry average.
Its trailing-12-month ROTA of 4.90% is 27.1% higher than the industry average of 3.85%, while its trailing-12-month asset turnover ratio of 1.92x is 92.5% higher than the 1.00x industry average.
For the fiscal second quarter ended June 25, 2023, PBPB’s total revenues increased 9.2% year-over-year to $126.62 million. Adjusted net income attributable to PBPB rose 38.5% from the prior-year quarter to $2.03 million.
Adjusted net income attributable to PBPB per share improved 40% from the same period last year to $0.07. Adjusted EBITDA came in at $8.04 million, up 38.6% year-over-year.
PBPB’s revenue is expected to increase 3.9% year-over-year to $122.20 million for the quarter ending September 2023. Its EPS is expected to come in at $0.01 for the same quarter.
Over the past year, the stock has gained 61.1% to close the last trading session at $7.70. It has also increased 38.2% year-to-date.
PBPB’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
It is ranked #5 in the same industry. It has a B grade for Value and Stability. To see additional PBPB ratings for Growth, Momentum, Sentiment, and Quality, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
ARCO shares were trading at $9.41 per share on Friday afternoon, down $0.01 (-0.11%). Year-to-date, ARCO has gained 14.50%, versus a 12.83% rise in the benchmark S&P 500 index during 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.
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