Restaurant stocks have been gaining this year as other areas of the retail market suffers from the growth in ecommerce. But when it comes to restaurant stocks, they are not all created equal, prompting Credit Suisse to come out with a list of its top picks, which includes Yum Brands Inc. (YUM), McDonald’s Corp. (MCD) and Dunkin Brand’s Group Inc. (DNKN).

In a research note to clients Thursday, Credit Suisse analyst Jason West highlighted Yum as a top stock to invest in, owing to the fact that it offers investors “stability and growth,” which he called a rare combination for a large cap consumer stock. What’s more, the Wall Street watcher said Yum has a “low sensitivity” to declining  same store sales trends in the U.S. and rising labor costs. West pointed to the fact that Yum spun out its Chinese business in October of last year and will have 98% of its stores franchised by the end of 2018. The transition to a franchise model should result in better margins and more earnings predictability, the analyst wrote, forecasting gross margins will reach 50% by 2019 up from 23% in 2016. Credit Suisse is also predicting 45% cumulative EPS growth from this year to 2019. (See also: Yum! Brands' Taco Bell Drafts Restaurant Growth Plan.)


In the case of fast food chain McDonald’s, West said the defensive nature of its business coupled with improving margins and the potential to have upside to same store sales over time keeps the Wall Street firm positive on the stock. “The U.S. business remains the primary stock driver and should continue to benefit from operational improvements, digital investments and product enhancements such as antibiotic-free chicken nuggets,” wrote the analyst. “The international business is also building momentum on the back of years of investments in the restaurants.” While the market already has high hopes for McDonald’s, West said costs savings, capital returns and the potential turnaround of the U.S. stores should drive the share price higher. (See also: Starbucks Vs. Dunkin' Donuts: Comparing Business Models.)

Credit Suisse’s third top pick is Dunkin Donuts. West said that while facing near-term competitive headwinds, he expects to still see franchise store growth at a rate of 4% or more, which will be the main driver of free cash flow and its valuation. The analyst noted checks indicate franchise owners are happy about expansion in the West. The analyst does see some risk to the stock due to the first-quarter same stores sales miss and the lack of downside pressure on the share price as a result but said investors should acquire shares because same store sales are likely to increase in the second quarter thanks in part to easier comparisons. He also cited a re-leverage event in the next few quarters that could drive an EPS surprise and the potential for upside thanks to corporate tax reform.



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