In the novel coronavirus environment, major disruptions in our lives and daily habits have occurred. Eating and dining are still essential. But lockdowns have put a lot of pressure on restaurant stocks and several bankruptcies in the food business and industry have happened.
Restaurant stocks are consumer staples stocks, providing essential products that even in adverse business conditions in theory should perform well.
The Covid-19 pandemic has shifted our daily personal and business life to a digital world and era. We use technology to do practically everything, and the restaurant sector is no exception to this. While a restaurant tech revolution is here, restaurant companies use technology to improve their operations, survive in this coronavirus crisis, and thrive after a return to pre-Covid business conditions is a reality.
The most often used technological solutions used by restaurant companies include digital drive-thru menus, mobile food-ordering apps, and digital ordering kiosks for takeout orders. Here are four restaurant stocks that use their digital business intending to generate higher sales with lower expenses, and in the end, have bigger profits.
Restaurant Stocks Betting on Tech: McDonald’s (MCD)
McDonald’s has a global reach, and this is beneficial for diversification in its business operations, with Asia and Europe along on the path to economic recovery. Back in early January 2020, CNBC reported that McDonald’s was focusing to implement a digital customer experience team and use technology for sales growth. Was it a coincidence a few months before the pandemic becoming a global concern?
“Digital is transforming global retail, and it will transform McDonald’s,” CEO Chris Kempczinski said.
MCD stock has a year-to-date performance of 5.5%, which is not impressive, but the stock rebounded from its lows in March 2020 and the stock market crash.
With a trailing 12-month price-earnings ratio of 31.8, the stock does not seem too cheap. But it has a forward dividend and yield of $5.16 and 2.5% respectively, making it an income stock. Growth is also evident for MCD stock, with an expected three- to five-year EPS growth of 8%, according to Zacks.
Jack in the Box (JACK)
Jack in the Box has utilized with success the adoption of technology with its mobile application to boost sales. Digitalization of business is a great source of revenue during the coronavirus outbreak.
Back in early summer, Zacks reported that for Jack in the Box digital business “delivery sales have more than doubled during the second quarter due to high mobile application usage.”
JACK stock has outperformed MCD stock on a year-to-date basis with a performance of 14.6%. The trailing 12-month P/E of 23.2 is not making it a bargain stock, but it is also an income stock for tough times with a forward dividend and yield of $1.60 and 1.8% respectively.
With an expected growth of 10.6% for the next three to five years, the stock is offering income and potential strong growth prospects.
Domino’s Pizza (DPZ)
For Domino’s Pizza, innovation and technology are synonymous business ideas. And they work very effectively. In the U.S. more than 65% of Domino’s sales are made via using digital channels and social media platforms, such as Facebook (NASDAQ:FB), and Twitter (NYSE:TWTR).
CEO Ritch Allison talked about the company’s response to Covid-19 in May:
“I am proud of the way the Domino’s system has responded rapidly to the COVID-19 environment, innovating across all aspects of our operations and our digital platforms to provide a contactless delivery and carryout experience.”
And that long-term emphasis is placed on technology. Surprisingly, U.S. sales were far better than international sales for the second quarter of 2020.
With a year-to-date performance of 31.6% for DPZ stock, the pizza business is doing well in the pandemic. The forward dividend and yield of $3.12 and 0.8%, respectively, do not impress.
What is impressive though, is the expected three-to-five-year EPS growth. At a 13.9% growth, better days for Domino’s sales should be expected when this pandemic is over on a global level, because international sales should be poised to recovery.
Chipotle embraces technology for sure and is placing a lot of emphasis on it. The company announced last month its first-ever Chipotle digital-only restaurant called the Chipotle Digital Kitchen, located in New York.
A restaurant only for pick-up and delivery: for Chipotle technology is not just a way to survive in this pandemic, but to express also the business culture, improve the customers’ experience and deliver sales growth, a highly desirable financial key metric.
“The Digital Kitchen incorporates innovative features that will complement our rapidly growing digital business while delivering a convenient and frictionless experience for our guests,” said Chipotle Chief Technology Officer Curt Garner. “With digital sales tripling year over year last quarter, consumers are demanding more digital access than ever before so we’re constantly exploring new ways to enhance the experience for our guests.”
Still, the stock is too pricey. With a trailing 12-month P/E of 161 and no dividend yield, the stock is too expensive. This has not stopped CMG stock to outperform all other three restaurant stocks in 2020. The stock has a year-to-date-performance of 60.8%.
What I like most about Chipotle is not its valuation, but its expected three-to five-year EPS growth of 20.7%.
While it’s been a tough year for the restaurant industry due to the pandemic, digital sales and wide adoption of the technology can mean better days for these restaurant stocks when the pandemic ends.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.