The tax cuts recently signed into law will be “a windfall for restaurants,” as restaurants’ revenue will be boosted through increased consumer spending and their profits should get a lift from lower tax bills, SunTrust wrote on Jan. 3 in a note to investors, according to The Fly. They believe restaurants’ comparable sales will rise from 0.5%-1% as a result of the tax cuts, while the deep discounts that had plagued the sector in recent years should dissipate.
I believe that investors looking to take advantage of these positive catalysts should buy McDonald’s Corporation (NYSE:MCD) stock, Darden Restaurants, Inc. (NYSE:DRI) stock, Yum! Brands, Inc. (NYSE:YUM) stock, and Habit Restaurants Inc (NASDAQ:HABT) stock.
Increased consumer spending power along with lower tax bills and a red-hot labor market should indeed be a boon for restaurants. Still, restaurants are facing some headwinds, including large reductions in mall traffic, higher spending on technology and the increased popularity of ordering food in.
Consequently, it’s important to pick restaurant stocks that will be boosted by the tax cut and whose offerings and outlook are appealing enough to withstand the headwinds.
Restaurant Stocks to Buy: McDonald’s (MCD)
McDonald’s is not dependent on mall traffic, and the vast majority of its hardcore customers should benefit from tax cuts. For the most part, only upper-middle-class and wealthy individuals who live in high-tax states won’t benefit from the tax cuts. Such individuals don’t eat at McDonald’s much.
In recent years, McDonald’s has constantly made its food healthier and more natural. In the latest such change, the company has switched to fresh beef at many of its restaurants. American customers clearly like the strategy, as the company’s U.S. same-store sales surged 4.5% last quarter. And as I noted in a recent column, the company’s decision to be more aggressive in the fast food chicken wars is a great call.
In summary, McDonald’s is clearly benefiting from the changes the company is making and has made, and those changes, along with the tax cuts, should continue to boost McDonald’s stock.
Restaurant Stocks to Buy: Yum! Brands (YUM)
Like McDonald’s, Yum! Brands is not dependent upon upper-income people who could be hurt by tax reform, and it’s not highly leveraged to malls. Meanwhile, its Taco Bell restaurants are resonating with Americans, as it “has drawn customers with wacky new foods, including fried-chicken taco shells, and a marketing campaign dubbed Live Mas.,” Bloomberg reported on Feb. 21. The restaurant’s sales surged 5% in the U.S. in 2017, and it overtook Burger King as the country’s fourth-largest domestic restaurant brand, Bloomberg quoted a third party as saying.
Yum estimated that its sales would jump 5%-6% in constant currencies in fiscal 2018, making Yum! Brands stock attractive at current levels.
Restaurant Stocks to Buy: Darden Restaurants (DRI)
Darden Restaurants is more leveraged to malls and upper-middle-class people than McDonald’s stock or Yum! stock. Still, as CNN pointed out last year, the company has had “an amazing comeback,” led by Olive Garden, which “accounts for more than half of Darden’s overall sales.” And Darden recently raised its fiscal 2018 earnings per share guidance to an impressive $4.70-$4.78 from $4.45-$4.53. noting that tax reform would lower its tax obligations by six percentage points.
Additionally, the forward price-to-earnings ratio of Darden stock is only 15.64 while its price to sales ratio is a reasonable 1.37.
Restaurant Stocks to Buy: Habit Restaurants (HABT)
Habit Restaurants stock is a bargain even after its recent rally, trading at a trailing price to sales ratio of just 0.7. The company’s restaurants are not highly leveraged to malls or upper-class people, making it a prime candidate to benefit from the tax cuts.
Moreover, Habit is committed “to using the freshest ingredients,” which should appeal to millennials and other consumers, and it has begun offering “digital deals” that should also be very-well-received by millennials and cost-conscious people of all generations.
McDonald’s, Yum! Brands, Darden and Habit Restaurant stock should all benefit significantly from tax reform and other, powerful catalysts as well. Investors should buy these stocks at current levels.
As of this writing, Larry Ramer did not own any of the stocks named.