The restaurant industry — and the restaurant stocks behind it — has been impacted to some extent by the novel coronavirus pandemic. However, beyond the current pandemic headwinds, industry growth is likely to remain strong.
Experts estimate that the industry size will increase to $1.2 trillion in fiscal 2030 from $833 million in 2018. Therefore, restaurant stocks are likely to remain in favor in the coming years.
With that in mind, here are four restaurant stocks that are worth considering for the long term.
- Chipotle Mexican Grill (NYSE:CMG)
- Starbucks (NASDAQ:SBUX)
- McDonald’s (NYSE:MCD)
- Yum China (NYSE:YUMC)
Restaurant Stocks: Chipotle Mexican Grill (CMG)
Among restaurant stocks, CMG stock is worth holding for the medium as well as the long term. In the last year, the stock has trended higher by 45% — and I see the momentum sustaining.
It is worth noting that for the second quarter of 2020, the company’s comparable restaurant sales declined by 9.8%. However, June 2020 comparable sales increased by 2%. Sales have continued to improve in July 2020. Clearly, Chipotle Mexican Grill is emerging from the slowdown triggered by the novel coronavirus. This will help maintain the positive momentum for CMG stock.
From a business growth perspective, the company opened 37 new restaurants in Q2. This implies an annualized restaurant opening of 140 to 150 restaurants. With healthy comparable restaurant sales growth, there is a strong reason to maintain accelerated restaurant openings.
This will help the company deliver strong top-line and earnings growth. Analyst estimates suggest that the company’s earnings growth is likely to average 19.3% annually over the next five years. The high growth factor makes CMG stock attractive.
Product innovation is also likely to drive comparable restaurant sales higher. As an example, the company recently launched new offerings that include cauliflower rice, organic beverages and quesadillas.
SBUX stock has been an underperformer, having declined by 25% in the last year. However, the stock has been consolidating around current levels and I believe an upside move is imminent. SBUX stock also has an attractive dividend payout of $1.64 per share. And I expect dividends to increase in the coming years.
Recently, Wells Fargo analyst Jon Tower assigned an “overweight” rating for SBUX stock with a price target of $92. This itself implies upside of 21% from current levels.
The company’s second-quarter results for 2020 were impacted due to the Covid-19 pandemic. However, during the quarter, the company opened 255 new net stores. This is an indication of continued aggressive expansion. In the long-term, this will translate into top-line and earnings growth.
In recent news, the company and Alibaba (NYSE:BABA) have expanded their partnership in China. I believe that China is a big growth market for the coming decade. In China, the company has already made the largest coffee manufacturing investment outside the United States. In addition, India’s growth is also likely to gain traction in the next few years. International sales can therefore drive growth.
Restaurant Stocks: McDonald’s (MCD)
MCD stock is another name among restaurant stocks that’s worth holding in a core, long-term portfolio. With a beta value of 0.66, McDonald’s is suitable for portfolio risk diversification. In addition, an annual dividend of $5.00 per share makes it attractive for income investors.
The stock has underperformed in the last year and has declined by 9%. But I see this as a good opportunity to accumulate shares.
While the company’s global comparable restaurant sales declined for Q1 2020, the decline was due to the coronavirus pandemic. For the first two months of the year, comparable sales growth was robust. I therefore expect strong sales growth to sustain once the current headwinds are navigated.
From a long-term growth perspective, McDonald’s has made inroads in several attractive markets globally. These include China, India, Brazil and Russia. I therefore expect earnings growth to remain strong along with growth in cash flows.
Overall, MCD stock is attractive for income investors and dividends will continue to increase in the coming years. The near-term weakness is an opportunity to invest in this value creator.
Yum China (YUMC)
With exposure to China and an aggressive growth outlook, YUMC stock is attractive. In the last year, the stock has trended higher by 16%. I believe that there is more upside with a medium- to long-term investment horizon.
Talking about growth plans, Yum China has 9,200 stores in China. The company is targeting 20,000 stores in the long term. This is an indication of its growth potential.
Clearly, as the number of restaurants grows, the company’s top-line and earnings growth are likely to be robust. Yum China has the financial flexibility to pursue aggressive growth.
As of Q1 2020, the company reported $1.7 billion in cash and equivalents. Importantly, the company has been generating free cash flows on a sustained basis. Besides store expansion, the financial flexibility leaves room for higher dividends and share repurchases.
Its worth noting that the company acquired the Huang Ji Huang group of restaurants in April 2020. The group has more than 640 restaurants in China and internationally. Therefore, inorganic growth is also likely to deliver results.
Overall, Yum China is likely to deliver robust growth in the coming years — and this makes YUMC stock worth holding.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.