Automation and the growing online food delivery market are likely to boost the restaurant industry in the long run. 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, fundamentally weak Dutch Bros (BROS) are now best avoided. Read more.
As labor shortages mar the restaurant industry, according to a forecast from restaurant consulting firm Aaron Allen & Associates, up to 82% of restaurant positions to some extent can be replaced by robots. Automation will likely save American fast food restaurants more than $12 billion in annual wages, the group said.
Moreover, the growing fame of hassle-free online delivery, various discount offers, convenient payment options, etc. is propelling the online food delivery market in the United States. IMARC Group expects the market to reach $46.50 billion by 2028 CAGR of 10% during 2023-2028.
In addition, the emergence of online delivery services has also led to the growth of ghost kitchens (aka cloud/dark kitchens). Euromonitor predicts that the haunted kitchen market will be worth it $1 trillion by 2030.
Given the industry’s solid long-term prospects, fundamentally strong restaurant stocks are McDonald’s Corporation (MCD), Nathan’s Famous, Inc. (NATH), and Rave Restaurant Group, Inc. (RATING) could be ideal purchases.
Given macroeconomic challenges, including inflation in labor and food costs and supply chain issues, Dutch Bros Inc.’s fundamentally weak restaurant stocks are in decline. (BRITTLE) is now best avoided.
Stocks to buy:
McDonald’s Corporation (MCD)
MCD and its franchisees are known to operate restaurants worldwide. The company operates in three segments: the United States (US); Internationally 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 its Accelerating the Arches growth strategy and a continued focus on driving long-term profitable growth for all stakeholders.
MCD pays $6.08 annually as a dividend. This translates into a return of 2.26% on the current price. It’s the four-year average dividend yield amounts to 2.27%. The company increased its dividend payments for 21 consecutive years.
MCD’s franchised restaurant revenues increased 4.6% year-over-year to $3.71 billion in the third quarter, which ended September 30, 2022. The company’s total operating costs and expenses decreased 3.3% year-over-year to $ 3.11 billion, while EPS stood at $2.68.
Analysts expect MCD’s EPS for the fiscal year ended December 2022 to be $9.95, indicating 7.3% year-over-year growth, while revenue is expected to reach $23 billion. In addition, it has beaten consensus earnings per share estimates in three out of four lagging quarters, which is impressive.
MCD’s 12-month EBIT margin of 43.70% is 449.1% higher than the industry average of 7.96%. The leveraged FCF margin of 17.77% is significantly higher than the industry average of 1.35%.
The stock is up 5.8% over the past three months to close out its last trading session at $269.29.
MCDs POWR ratings reflect the promising prospects. The stock has an overall rating of B, which translates to a buy in our proprietary rating system. The POWR ratings are calculated by considering 118 different factors, with each factor optimally weighted.
MCD also has an A grade for quality and a B grade for stability and sentiment. It is ranked number 16 out of 46 stocks in the B rating Restaurants industry.
To access additional MCD growth, value and momentum assessments, click here.
Nathan’s Famous, Inc. (NATH)
NATH operates in the foodservice industry as the owner of franchised restaurants under the Nathan’s Famous brand name. The company also sells Nathan’s Famous trademarked products through various distribution channels.
On December 14, NATH announced the launch of a new franchise sales initiative specifically aimed at these struggling restaurant owners, offering to cost-effectively convert their location into a Nathan’s Famous.
The conversion program is expected to provide flexibility in the restaurant’s design, equipment and infrastructure, often leveraging the restaurant’s current arrangement to save costs and open quickly. Potential franchisees can also take advantage of additional revenue opportunities through the haunted 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 an average 4-year dividend yield of 2.3%. Dividend payments have grown at a CAGR of 11.5% over the past three years. It has also paid dividends for four consecutive years.
NATH’s total revenues increased 14% year over year to $37.50 million in the fiscal second quarter ended September 25, 2022. Adjusted EBITDA and operating income increased 32.8% and 33.3% year over year to respectively $10.32 million and $9.91 million. Also, net income and earnings per share came in at $5.96 million and $1.46, up 68.1% and 69.8% year-over-year, respectively.
The stock’s 12-month EBIT margin of 26.13% is 228.3% higher than the industry average of 7.96%. The leveraged FCF margin of 11.04% is 720.2% higher than the industry average of 1.35%.
The stock is up 47.4% over the past nine months to close out its last trading session at $71.55.
NATH’s robust outlook is reflected in the POWR ratings. The stock has an overall A rating, which equates to a strong buy in our proprietary rating system.
NATH has an A grade for quality and a B grade for sentiment and stability. It ranks first in the same industry.
click here to see the additional POWR ratings for NATH (Growth, Value, and Momentum).
Rave Restaurant Group, Inc. (RATING)
RAVE operates and franchises pizza buffets, delivery/takeaway restaurants and express restaurants under the trademark Pizza Inn worldwide. It operates through three segments: Pizza Inn Franchising; Cake Five Franchising; and on-site 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 7.7% year-over-year to $307 thousand. Adjusted EBITDA increased 25.8% year-over-year to $542k. In addition, earnings per share came in at $0.02.
RAVE’s 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% is comparable to the industry average of 1.35%.
The stock is up 73.5% over the past year to close out 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 grade for quality and a B for value and sentiment. Within the same industry, it ranks number 3.
In addition to the numbers above, we also provided RAVE numbers for growth, momentum and stability. Get all RAVE ratings here.
Stock to avoid:
Dutch Bros. Inc. (BRITTLE)
BROS operates and franchises drive-thru stores. It offers Dutch Bros hot and cold beverages based on espresso and cold brew coffee products, as well as Blue Rebel energy drinks, teas, lemonades, 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 earnings per share to decline 51.5% year over year to $0.15 for the fiscal year ending December 2022. In addition, BROS has beaten consensus earnings estimates in three of the last four quarters not surpassed.
The 12-month gross profit margin of 23.52% is 33.9% lower than the industry average of 35.58%, while the EBITDA margin of 3.47% is 68.7% lower than the industry average of 11.09%.
The stock is down 32.8% over the past nine months to close out its last trading session at $34.42.
BROS’s POWR ratings reflect this bleak outlook. The stock has an overall D rating, which equates to a sell in our proprietary rating system.
The stock is graded D in stability, value, and quality. It ranks #43 in the same industry.
In addition to the POWR ratings we listed above, BROS’s rating for Sentiment, Momentum, and Growth can be seen here.
MCD shares were unchanged during premarket trading on Tuesday. Year-to-date, MCD has gained 2.19%, versus a 4.76% gain in the benchmark S&P 500 index over the same period.
About the author: Kritika Sarmah
Her interest in risky instruments and passion for writing turned Kritika into an analyst and financial journalist. She received her bachelor’s degree in commerce and is currently attending the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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