The restaurant industry ranges from local mom-and-pop eateries to national and international chains. The industry is notoriously difficult for business owners, with about 60% of new restaurants failing within their first year. One reason for this is that restaurant spending tends to be heavily discretionary, fluctuating dramatically with the broader economy. During the COVID-19 pandemic, financial pressure increased sharply on restaurants and restaurant chains as many of them faced rising costs, mounting debt, and falling sales. While sales have partly rebounded in the past year, restaurant owners are now grappling with inflation and the prospect of an economic recession. Some of the best-known publicly traded restaurants include McDonald's Corp. and Chipotle Mexican Grill Inc.
The restaurant industry, represented by the Dow Jones U.S. Restaurants & Bars Index, has outperformed the broader market with a total return of -7.3% over the past 12 months, as of Sept. 15, 2022. By comparison, the Russell 1000's total return over the same period is -13.1%. All statistics in the tables below are also as of Sept. 15, 2022.
Here are the top three restaurant stocks with best value, fastest growth, and most momentum.
Best Value Restaurant Stocks
These are the restaurant stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows you’re paying less for each dollar of profit generated.
|Best Value Restaurant Stocks|
|Price ($)||Market Cap ($B)||12-Month Trailing P/E Ratio|
|Denny's Corp. (DENN)||10.04||0.6||6.4|
|Brinker International Inc. (EAT)||28.86||1.3||11.1|
|El Pollo Loco Holdings Inc. (LOCO)||9.13||0.3||12.9|
- Denny's Corp.: Denny's operates a franchised full-service restaurant chain. Denny's restaurants offer items including breakfast-all-day foods, burgers, sandwiches, salads, and various beverages, appetizers, and desserts. On July 20, Denny's announced that it had completed the acquisition of Keke's Breakfast Café, a restaurant chain specializing in breakfast and lunch dishes. The acquisition was valued at $82.5 million.
- Brinker International Inc.: Brinker International owns, operates, and franchises the restaurant brands Chili's Grill & Bar and Maggiano's Little Italy, as well as virtual brands. The company operates principally in the U.S.
- El Pollo Loco Holdings Inc.: El Pollo Loco Holdings is a holding company which operates El Pollo Loco restaurants. El Pollo Loco specializes in fire-grilled chicken and burritos, salads, tostadas, and bowls.
Fastest Growing Restaurant Stocks
These are the top restaurant stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly YOY percentage revenue growth and their most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company. Therefore ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one or the other figure unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of over 2,500% were excluded as outliers.
|Fastest Growing Restaurant Stocks|
|Price ($)||Market Cap ($B)||EPS Growth (%)||Revenue Growth (%)|
|Arcos Dorados Holdings Inc. (ARCO)||7.44||1.6||250.0||49.8|
|Recipe Unlimited Corp. (RECP.TO)||CA$20.62||CA$1.2||-15.2||62.1|
|Luckin Coffee Inc. (LKNCY)||17.30||4.6||N/A (see company description)||68.5|
Source: YCharts and Sweetgreen Inc.
- Arcos Dorados Holdings Inc.: Arcos Dorados Holdings is a Uruguay-based McDonald's franchisee. It operates 2,250 restaurants across Latin America and the Caribbean, making it the largest independent McDonald's franchisee in the world. The company reported Q2 2022 earnings results on Aug. 10. Net income attributable to the company nearly tripled year-over-year (YOY) on substantial revenue growth. The company cited growth across its digital, delivery, and drive-thru channels among factors contributing to performance.
- Recipe Unlimited Corp.: Recipe Unlimited is a Canada-based full-service restaurant franchisor operating roughly 20 brands including Swiss Chalet, Harvey's, St-Hubert, and The Keg. On Sept. 1, Recipe announced that it had entered into an agreement to be purchased by 1000297337 Ontario Inc., a subsidiary of Fairfax Financial Holdings Ltd. The purchaser will acquire all outstanding shares of Recipe for an estimated CA$1.2 billion ($900 million). The deal is expected to close in the final quarter of 2022
- Luckin Coffee Inc.: Luckin Coffee is a China-based holding company that operates a coffee retail business. The company operates primarily through mobile apps and pick-up stores, selling fresh-brewed drinks, juices, and light meals. On Aug. 8, Jing An was appointed chief financial officer (CFO) of the company, succeeding Reinout Hendrik Schakel, who will continue to serve as Luckin's chief strategy officer. An was previously CFO of 58 Daojia Inc. Luckin does not have an EPS growth figure in the table above because it had negative EPS for the most recent quarter.
Restaurant Stocks With the Most Momentum
These are the restaurant stocks that had the highest total return over the last 12 months.
|Restaurant Stocks With the Most Momentum|
|Price ($)||Market Cap ($B)||12-Month Trailing Total Return (%)|
|Arcos Dorados Holdings Inc. (ARCO)||7.44||1.6||37.0|
|Compass Group PLC (CMPGY)||21.93||39.1||8.9|
|McDonald's Corp. (MCD)||253.47||186.5||7.6|
|Dow Jones U.S. Restaurants & Bars Index||N/A||N/A||-7.3|
- Arcos Dorados Holdings Inc.: See above for company description.
- Compass Group PLC: Compass Group is a British food and support services company. It provides services across 45 countries and five sectors.
- McDonald's Corp.: McDonald's operates and franchises fast-food restaurants globally. The company's menu includes burgers, fries, sandwiches, a range of beverages, and more. In mid-September, McDonald's announced the launch of Speedee Labs, a new facility based in Chicago that will focus on finding new ways to drive customer experience and support the global chain's restaurant teams. The facility builds on McDonald’s Speedee Service System, introduced in 1948, which transformed the restaurant business by streamlined crew responsibilities as well as other steps.
Analyzing Restaurant Stocks
When analyzing restaurant stocks, here are some terms and metrics used in the restaurant industry that an investor should assess:
- System sales: Restaurant companies have several different operating structures, including company-owned stores, franchised stores, or a mixture of both. So "system sales" refers to combined sales across all operating outlets. Tracking system sales helps in understanding how the restaurant chain (company-owned and franchised stores) is performing as a whole.
- Revenue: For the restaurant industry, revenue is slightly different than system sales. A restaurant chain's revenue is the aggregate franchising fee that it earned from its franchises, but not their revenue, plus the revenue it earned from from company-owned stores.
- Comparable sales: Restaurant chains increase revenue by opening new stores and by expanding sales of their existing stores. The comparable-sales figure tracks the latter: sales from stores that already existed a year ago but not the revenue from new stores. This is because newly opened outlets generally aren't profitable and lack customer traffic at first. Also, comparable-sales growth shows how much the company's revenue from existing stores is increasing.
Trends in Restaurant Stocks
Several trends are shaping the restaurant industry and the price of its stocks, especially since the pandemic started in early 2020. Many of them are shaped by changing customer preferences and new technologies, and stock performance will likely reflect how well the companies adapt to each. These trends include:
- Online ordering and food delivery: Thanks to apps like Uber Eats and Grubhub, it's now easier than ever for consumers to get their favorite foods delivered to their doorstep. And as more people are working from home and spending less time cooking, the demand for food delivery and takeout services is only increasing.
- Ghost kitchens: These are commercial kitchens that prepare food exclusively for delivery or takeout orders without a dine-in option. Ghost kitchens are becoming increasingly popular, as they allow restaurants to focus solely on takeaway orders without having to invest in a brick-and-mortar location.
- Healthy eating: Consumers are becoming more health conscious, and they're beginning to demand healthier options from restaurants. These include more plant-based proteins, salads, and grain bowls on menus across the country.
- Technology: Technology is changing the way restaurants operate—customers are accustomed to using tools like Yelp and Google Maps to find nearby eateries and read reviews before going out to eat. As a result, restaurants have made online ordering systems, kitchen automation devices, and point-of-sale systems integral to operations. Tech innovations will continue to play a dominant role in the future of the industry, with robotics and drone delivery ahead.
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