Automation and the growing online food delivery market will likely drive the restaurant industry in the long term. Therefore, fundamentally strong restaurant stocks McDonald’s ( MCD ), Nathan’s Famous ( NATH ), and Rave Restaurant ( RAVE ) could be ideal buys for 2023. However, given macroeconomic headwinds, it’s best to avoid them now – it with Dutch Bros (BROS) fundamentally weak. Read more
While labor shortages have been crippling the restaurant industry, according to a forecast by restaurant consulting firm Aaron Allen & Associates, as many as 82 percent of restaurant positions could, to some degree, be replaced by robots. Automation is likely to save US fast-food restaurants more than $12 billion in annual wages, the group said.
Also, growing prominence of hassle-free online delivery, various discount offers, convenient payment options, etc. are driving the online food delivery market in the United States. IMARC Group expects the market to reach $46.5 billion by 2028, showing a CAGR of 10% during 2023-2028.
Additionally, the rise of online delivery services has also led to the growth of ghost kitchens (or cloud/dark kitchens). Euromonitor predicts that the ghost kitchen market will be worth $1 trillion by 2030.
Given the industry’s strong long-term outlook, fundamentally sound restaurant stocks McDonald’s Corporation (MCD), Nathan’s Famous, Inc. (NATH) and Rave Restaurant Group, Inc. (RAVE) could be ideal buys.
However, given macroeconomic challenges such as food and labor cost inflation and supply chain issues, it’s now best to avoid fundamentally weak restaurant stocks Dutch Bros Inc. (BROS).
Stocks to buy:
McDonald’s Corporation (MCD)
MCD and its franchisees are known for operating restaurants globally. The company operates through three segments: the United States (US); International Operated Markets (IOM); and International Developmental Licensed Markets & Corporate (IDL).
On October 13, MCD announced a 10% increase over the company’s previous quarterly dividend, reflecting confidence in the Accelerating the Arches growth strategy and a continued focus on driving long-term profitable growth for all interested parties.
MCD pays $6.08 per year in dividends. This translates to a yield of 2.26% on the current price. Its average four-year dividend yield is 2.27%. The company increased its dividends for 21 consecutive years.
MCD’s revenue from franchised restaurants increased 4.6% year-over-year to $3.71 billion in the third quarter ended September 30, 2022. The company’s total operating costs and expenses decreased 3. 3% YoY to $3.11 billion, while its EPS. stood at $2.68.
Analysts expect MCD’s EPS for the fiscal year ending December 2022 to be $9.95, indicating year-over-year growth of 7.3%, while its revenue is expected to be 23 billion dollars. It has also beaten consensus EPS estimates in three of the trailing four quarters, which is impressive.
MCD’s trailing 12-month EBIT margin of 43.70% is 449.1% higher than the industry average of 7.96%. Its FCF leverage margin of 17.77% is significantly higher than the industry average of 1.35%.
The stock has gained 5.8% over the past three months to close the last trading session at $269.29.
MCD’s POWR ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a buy in our proprietary rating system. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
MCD also has an A grade for Quality and a B grade for Stability and Feel. It ranks #16 out of 46 stocks in the B-rated restaurant industry.
To access additional ratings for MCD’s Growth, Value, and Momentum, click here.
Nathan’s Famous, Inc. (NATH)
NATH operates in the food service industry as an owner of franchise restaurants under the Nathan’s Famous brand. The company also sells products bearing the Nathan’s Famous trademarks through various distribution channels.
On Dec. 14, NATH announced the launch of a new franchise sales initiative aimed specifically at these struggling restaurant owners, offering to profitably convert their location into a Nathan’s Famous.
The conversion program is expected to offer flexibility in restaurant design, equipment and infrastructure, often using the restaurant’s current layout to save costs and open quickly. Prospective franchisees can also take advantage of additional revenue opportunities through its ghost kitchen brands, Arthur Treacher’s and Wings of New York.
The company pays an annual dividend of $1.80, which translates to a yield of 2.51% at the current price, and has a 4-year average dividend yield of 2.3%. Its dividend payouts have grown at a CAGR of 11.5% over the past three years. In addition, it has paid dividends for four consecutive years.
NATH’s total revenue increased 14% year-over-year to $37.50 million in the fiscal second quarter ended September 25, 2022. Adjusted EBITDA and income from operations increased 32.8% and 33.3% year-over-year to $10.32 million and $9.91 million, respectively. . Additionally, its net income and earnings per share totaled $5.96 million and $1.46, up 68.1% and 69.8% year-over-year, respectively.
The stock’s trailing 12-month EBIT margin of 26.13% is 228.3% higher than the industry average of 7.96%. Its leveraged FCF margin of 11.04% is 720.2% higher than the industry average of 1.35%.
The stock has gained 47.4% over the past nine months to close the last trading session at $71.55.
NATH’s strong outlook is reflected in its POWR ratings. The stock has an overall rating of A, which equates to a strong buy in our proprietary rating system.
NATH has an A grade for Quality and a B grade for Feel and Stability. It ranks first in the same industry.
Click here to view additional POWR rankings for NATH (Growth, Value and Momentum).
Rave Restaurant Group, Inc. (DELIRIUS)
RAVE operates and franchises pizza buffets, delivery/delivery and express restaurants under the Pizza Inn brand worldwide. It operates through three segments: Pizza Inn Franchising; Pie Five Franchise; and Company-Owned Restaurants.
For the fiscal first quarter ended September 25, 2022, RAVE’s revenue increased 17.7% year-over-year to $3.01 million. The company’s net income increased by 7.7% year-on-year to 307 thousand dollars. Its adjusted EBITDA increased by 25.8% year-over-year to 542 thousand dollars. Also, its EPS reached $0.02.
RAVE’s trailing 12-month net income margin of 72.18% is significantly higher than the industry average of 5.18%, and its leveraged FCF margin of 21.45% compares to the average of the industry of 1.35%.
The stock has gained 73.5% over the past year to close the last trading session at $1.70.
RAVE has an overall rating of A, which translates to a strong buy in our proprietary rating system.
RAVE has an A for Quality and a B for Value and Feeling. Within the same industry, it ranks third.
In addition to the above ratings, we have also given RAVE ratings for growth, momentum and stability. Get all the RAVE scores here.
Stock to avoid:
Dutch Bros Inc. (BROS)
BROS operates and franchises automotive stores. It offers Dutch Bros cold and hot coffee-based beverages and cold coffee products, as well as Blue Rebel energy drinks, tea, lemonade, smoothies and other beverages through company-operated stores and online channels.
BROS’ operating loss was $6.38 million for the nine months ended September 30, 2022. Net loss for the same period was $16.44 million or $0.08 per share .
Analysts expect BROS’s EPS to decline 51.5% year-over-year to $0.15 for the fiscal year ending December 2022. Also, BROS missed consensus revenue estimates in three of the following four quarters.
Its trailing 12 month gross profit margin of 23.52% is 33.9% lower than the industry average of 35.58%, while its EBITDA margin of 3.47% is 68 .7% lower than the sector average of 11.09%.
The stock has fallen 32.8% over the past nine months to close its last trading session at $34.42.
BROS’s POWR ratings reflect this bleak outlook. The stock has an overall rating of D, equivalent to a Sell in our proprietary rating system.
The stock is rated D in stability, value and quality. It ranks number 43 in the same industry.
In addition to the POWR ratings we listed above, you can see the BROS rating for Sentiment, Momentum, and Growth here.
Shares of MCD were flat in premarket trading on Tuesday. Year-to-date, MCD has gained 2.19%, versus a 4.76% rise in the benchmark S&P 500 over the same period.
About the Author: Kritika Sarmah
Her interest in risk instruments and her passion for writing led Kritika to be a financial analyst and journalist. He earned his bachelor’s degree in commerce and is currently pursuing the CFA program. With its fundamental approach, it aims to help investors identify untapped investment opportunities.
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