The pandemic has hit restaurants hard. Almost all restaurants saw sales and earnings decline over the past year. And given the state of the globe, a large number of restaurants still face uncertainty. However, the pent-up demand in the sector will likely provide tailwinds as the year continues. Because of that, these seven restaurant stocks deserve your attention in the second quarter.
The prospects for restaurant stocks has become tied to the return to “normality.” With more and more individuals getting vaccinated, the Street expects the segment to pick up throughout 2021.
In the early days of the pandemic, the top chains were quick to introduce further digitalization and delivery options that supported their operations. Now, as the economy opens up, we are looking at increased customer visits at sit-down restaurants. The sit-down restaurants that can also stay ahead of digital trends and consumer preferences will likely be the winners once things fully reopen.
All in all, Q2 might be a good time to shift your focus back to the industry. So, here are seven restaurant stocks that are best positioned for long-term growth on the road toward economic recovery:
- Chuy’s (NASDAQ:CHUY)
- Domino’s Pizza (NYSE:DPZ)
- Global X Millennials Thematic ETF (NASDAQ:MILN)
- Invesco Dynamic Leisure and Entertainment ETF (NYSEARCA:PEJ)
- Starbucks (NASDAQ:SBUX)
- Texas Roadhouse (NASDAQ:TXRH)
- Yum China (NYSE:YUMC)
Restaurant Stocks to Buy: Chuy’s Holdings (CHUY)
52-week range: $12.37 – $47.65
Year-to-date (YTD) change: Up about 73%
Based in Austin, Texas, Chuy’s offers freshly prepared Mexican and Tex-Mex inspired food — from fajitas to burritos and more.
Chuy’s Holdings reported Q4 and 2020 full year results in early March. Revenue was $78.7 million in the quarter, compared to $102 million in the prior-year period, a result of a pandemic-induced decline in customer traffic. On top of that, adjusted net income was $3.9 million (19 cents per diluted share) compared to $3.3 million (20 cents per diluted share) a year ago. Finally, as of late December, the company had $86.8 million in cash and equivalents as well as no debt. On the results, CEO Steve Hislop stated:
“Despite closures of certain dining rooms in November and December due to heightened COVID-19 restrictions [..] we were able to sequentially improve comparable sales for the fourth quarter as compared to the third quarter of 2020 […] we are cautiously optimistic about the strength of our business and will remain nimble to the ever-changing market conditions as we begin 2021.”
Chuy’s has around 100 restaurants in 17 states. Management prides itself on the originality of each restaurant, specifically avoiding the “cookie-cutter” approach. The company is intentionally avoiding the franchise model.
As the country opens up further, the outlook for Chuy’s in 2021 is strong. Right now, CHUY stock’s forward price-earnigs (P/E) and price-sales (P/S) ratios are 40.14 and 2.41, respectively. Any decline toward the $40 level would improve the margin of safety in this pick of the restaurant stocks.
Domino’s Pizza (DPZ)
52-week range: $319.71 – $435.58
YTD change: Up about 3%
Dividend yield: 0.95%
Domino’s Pizza is a leading player in the quick-service pizza segment. With its significant market share, the company operates through three segments: domestic stores, international franchise and supply chain. It has 17,600 stores in 90 markets worldwide.
Domino’s reported Q4 and 2020 full year results in late February. Global retail sales increased 21.7% in the fourth quarter while net income increased $22.6 million, or about 17.5%, in the fourth quarter. Adjusted diluted earnings per share (EPS) was also $3.46, compared to $3.13 in the prior-year period. Additionally, as of early January, Domino’s had approximately $168.8 million of unrestricted cash and equivalents and $4.12 billion in total debt.
Maybe CEO Ritch Allison sums it up best, though. On the results, Allison noted, “[Domino’s] celebrated our 60th year as a company in 2020, and while it was a challenging year in so many ways, it was also a year that saw the Domino’s brand rise to the occasion all over the world.”
If you are looking for a winner during the pandemic, look no further than DPZ stock. Delivery accounts for a lot of Domino’s’ business. In 2020, digital channels brought in 70% of total sales. That has helped the company last through the pandemic but should also help it in the future.
This pick of the restaurant stocks has forward P/E and P/S ratios of 30.51 and 3.57, respectively. From where it trades today, a potential decline toward the $375 level would improve the risk-return profile of the shares.
Global X Millennials Consumer ETF (MILN)
52-Week Range: $21.41 – $43.13
YTD change: Up about 13%
Dividend yield: 0.27%
Expense ratio: 0.50% per year
The next entry on this list of restaurant stocks is an exchange-traded fund (ETF) with broader reach than other names on this list. The Global X Millennial Consumer ETF invests in companies that are likely to benefit from the rising spending habits and demographic trends of the millennial generation. The fund started trading in May 2016. Net assets under management total over $211 million.
The fund, which tracks the returns of the Indxx Millennials Thematic Index, also has 83 holdings. Approximately 30% of the holdings are in the top ten stocks. The companies cover a broad range of categories, including social media and entertainment, health and fitness, food and dining and much more. Among the leading names are Starbucks, Uber (NYSE:UBER) and Amazon (NASDAQ:AMZN).
Consumer Discretionary, Communication Services and Information Technology sectors make up 42.9%, 25.2% and 21.1% of its holdings, respectively. All in all, the thematic focus of MILN — which includes restaurant and food names alongside other stocks — has wide appeal. Interested investors could consider buying MILN stock around $40 or below.
Invesco Dynamic Leisure and Entertainment ETF (PEJ)
52-week range: $23.85 – $55.25
YTD change: Up about 14%
Dividend yield: 0.17%
Expense ratio: 0.63% per year
The Invesco Dynamic Leisure and Entertainment ETF invests in businesses based on several criteria, including price momentum, earnings momentum, quality, management action and value. The fund tracks the Dynamic Leisure & Entertainment Intellidex Index.
PEJ stock represents 32 other stocks, a number of which are in the restaurant business. The holdings include Chipotle Mexican Grill (NYSE:CMG) and Doordash (NYSE:DASH) as well as several other food and entertainment names.
This fund started trading in 2005 and its net assets under management total $1.91 billion. Approximately 44% of the holdings are in the top ten stocks. All in all, PEJ stock could be an appropriate choice for readers who prefer to invest in a basket of names, as opposed to individual shares of just one of the restaurant stocks.
52-week range: $70.64 – $118.98
YTD change: Up about 11%
Dividend yield: 1.52%
Based in Seattle, Starbucks needs little introduction. As one of the most widely recognized restaurant brands in the world, it operates around 33,000 stores across over 75 countries.
Starbucks reported Q1 fiscal 2021 results in late January. Consolidated net revenues were $6.75 billion in the first quarter, declining 5% year-over-year (YOY). Net income stood at $622 million, representing a 30% decline YOY. GAAP earnings per share was 53 cents, down about 28% from 74 cents in the prior-year quarter.
In 2020, Starbucks’ revenue declined 11% for the fiscal year and its global comparable-store sales fell 14%. Despite the uncertainties in the past year, however, the group opened more than 1,400 new stores in 2020. On the company’s Q1 results and moving forward into the new year, CEO Kevin Johnson said, “I am very pleased with our start to fiscal 2021, with meaningful, sequential improvements in quarterly financial results despite ongoing business disruption from the pandemic.”
Right now, SBUX stock’s forward P/E and P/S ratios are 41.50 and 4.87, respectively, pointing to a frothy valuation level. As such, interested investors might want to analyze the next results before committing new capital to this pick of the restaurant stocks. A potential decline toward $100 would make SBUX more attractive.
Texas Roadhouse (TXRH)
52-week range: $41.68 – $100.77
YTD change: Up about 25%
Next up on this list of restaurant stocks, Texas Roadhouse operates in the casual dining segment and has more than 600 restaurants in all 50 states as well as a handful of international locations.
Texas Roadhouse reported Q4 2020 results in February. Total revenue was about $638 million, declining 12% from $725 million in the prior-year quarter. Net income stood at $19.5 million, representing a 54% decline from $42.7 million in Q4 2019. Finally, diluted EPS was 28 cents, down from 61 cents. On the results, CEO Kent Taylor commented:
“Despite […] challenges, our operators quickly adapted and found ways to continue to serve our guests, many times in ways they never had before. This sustained our cashflows at a level that allowed us to continue to grow by opening 22 restaurants during the year. While we expect continued headwinds in the first half of 2021, we remain well-positioned for future growth.”
This year, management expects to open 25 to 30 new restaurants. That bodes well for the company moving forward.
TXRH stock’s current forward P/E and P/S ratios are 39.91 and 2.28, respectively. So, a potential decline toward the $90 level would improve the margin of safety for investors.
Yum China (YUMC)
52-week range: $43.50 – $64.64
YTD change: Up about 5%
Dividend yield: 0.80%
With $8.26 billion in sales in 2020, Yum China is the largest restaurant chain in China and the last entry on this list of restaurant stocks. It generates revenue through its own restaurants and franchise fees, operating brands like KFC, Pizza Hut, Little Sheep and Taco Bell.
Yum China reported Q4 and full-year results in early March. Total revenues in the fourth quarter increased 11% YOY to $2.26 billion. Adjusted net income increased 56% to $153 million. Finally, adjusted diluted EPS increased 40% to 35 cents. On the results, CEO Joey Wat commented:
“Fourth quarter results marked a strong finish to 2020, with same-store sales recovering sequentially and double-digit operating profit growth […] Our industry-leading digital capabilities enable us to stay agile in this ever-evolving situation. We remain committed to growth and intend to open approximately 1,000 new stores in the year ahead. Our confidence in the long-term potential of China is unshaken.”
As China becomes more urbanized, analysts expect restaurant chains to increase market share. This company opened 1,165 new restaurants in 2020 despite the pandemic. Now, management is targeting another 1,000 for 2021.
Currently, YUMC stock’s forward P/E and P/S ratios are 30.52 and 2.51, respectively. Potential investors could consider buying the stock around $57, a few dollars below where it trades today.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.