1 Restaurant Stock to Consider Right Now and 2 That Underwhelm
From fast food to fine dining, restaurants play a vital societal role. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough. This makes spending somewhat unpredictable and has held back the industry over the past six months as its 7.7% gain has trailed the S&P 500 by 5.9 percentage points.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. 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:
Yum China (YUMC)
Market Cap: $14.9 billion
One of China’s largest restaurant companies, Yum China (NYSE:YUMC) is an independent entity spun off from Yum! Brands in 2016.
Why Are We Hesitant About YUMC?
- Annual sales growth of 5.5% over the last seven years lagged behind its restaurant peers as its large revenue base made it difficult to generate incremental demand
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Lacking pricing power results in an inferior gross margin of 20.3% that must be offset by turning more tables
Yum China’s stock price of $43.59 implies a valuation ratio of 13.5x forward P/E. If you’re considering YUMC for your portfolio, see our FREE research report to learn more.
El Pollo Loco (LOCO)
Market Cap: $467.8 million
With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.
Why Do We Think LOCO Will Underperform?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Modest revenue base of $500.8 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Estimated sales growth of 2.3% for the next 12 months is soft and implies weaker demand
El Pollo Loco is trading at $15.33 per share, or 15.1x forward P/E. To fully understand why you should be careful with LOCO, check out our full research report (it’s free).
One Restaurant Stock to Watch:
Dutch Bros (BROS)
Market Cap: $6.43 billion
Started in 1992 by two brothers as a single pushcart, Dutch Bros (NYSE:BROS) is a dynamic coffee chain that’s captured the hearts of coffee enthusiasts across the United States.
Why Do We Watch BROS?
- Rapid rollout of new restaurants to capitalize on market opportunities makes sense given its strong same-store sales performance
- Same-store sales growth over the past two years shows it’s successfully drawing diners into its restaurants
- Expected revenue growth of 27.8% for the next year suggests its market share will rise
At $46.59 per share, Dutch Bros trades at 40.4x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
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