A drop in consumer spending has impacted the retail sector and the restaurant sector. Fortunately, consumers are loosening their grip on the wallet and we have seen a slow but significant improvement in spending. When it comes to the restaurant sector, it improves in line with the economy. Hence, as the economy improves, we will also see the restaurant sector recover. However, some restaurant stocks have been standing strong despite inflation concerns and these stocks have managed to handle the economic situation well. Investing in these stocks will ensure that your portfolio continues to thrive, no matter how the market moves. As the holiday season starts approaching, it is the best time to make your move and consider these top restaurant stocks to buy before they soar higher.
Restaurant stocks to buy: McDonald’s (MCD)
If there’s one stock that can thrive even in a market downturn, it’s McDonald’s (NYSE:MCD). The fast food giant has impressed investors with the last few earnings updates and despite a pullback in consumer spending, the company has had a good year. With the next quarterly earnings scheduled to happen soon, investors should be prepared for good news. In the second quarter, the company saw a 12% year-over-year (YOY) increase in global sales and 10% in the U.S. market.
McDonald’s has achieved success with its franchise business which allows it to keep the costs down while steadily generating income. It has established dominance in the market and has seen a steady rise in sales. This also shows that its core menu items are a hit amongst consumers. The franchise model allows the company to convert a significant part of the revenue into operating profit. It also has a very strong cash flow through which the company rewards shareholders.
It has a dividend yield of 2.39% and a quarterly dividend payout of $1.52. There is a high chance that this payout will increase in the coming years. Exchanging hands at $254 today, the stock is at a premium but it is well deserved. It is lower than the 52-week high of $299 but has a significant upside potential. Stock predictions about MCD are extremely positive.
Even if there is a recession, this business will survive it. Look beyond the recent rockiness in the economy and keep the bigger picture in mind. This is one restaurant stock that can appeal to income and growth investors. Buy MCD stock while it is trading at a discount.
Wendy’s Company (WEN)
Wendy’s Company (NASDAQ:WEN) is another restaurant stock worth keeping your eyes on. Based in Ohio, the company already operates in more than 7,000 locations and is one of the top 10 restaurant companies in terms of size. One big reason to like this stock is its solid dividend yield. The company boasts of a dividend yield of 5.15% and has paid a quarterly dividend of 25 cents. It will not only generate passive income for you but will also appreciate in terms of value. Trading at $19.40, it looks highly undervalued to me.
Besides the solid dividend, the company has a solid balance sheet. In the recent quarter, it reported a revenue of $561 million and an EPS of 28 cents. Just like McDonald’s, Wendy’s also enjoys a successful franchise business.
It makes steady revenues from higher sales and is steadily opening new restaurants. The company has fewer company-owned restaurants which means lower costs and less money spent on capital expenses. It ultimately improves the cash flow position.
In order to make drive-through ordering convenient for consumers, it has incorporated artificial intelligence (AI) into the business and is working on a robot to help with quick food delivery. Let’s not forget that the stock is trading below $20 and it could soar in 2024.
Chipotle Mexican Grill (CMG)
One cannot talk about restaurant stocks without the mention of Chipotle Mexican Grill (NYSE:CMG). Yes, the company has faced several challenges due to food safety issues, but it is set for solid growth. The company attracts consumers toward the fresh food and it gains an edge over other restaurant chains that offer less healthy options. Chipotle is one of the biggest players in the industry and has managed to improve its operating margins significantly. It has seen an impressive rise in revenue which has gone from just $200 million in 2002 to a whopping $8.6 billion last year. For the second quarter, revenue hit $2.5 billion, a 13.6% YOY rise, and operating margins went from 15.3% to 17.2%.
The company is steadily opening new restaurants and expanding its market share. It has enough liquidity to keep growing the market and hitting new locations across the world. The company is trying automation and testing a robot to assemble burrito bowls and salads. It will be used for offline orders and could reduce the cost of operations.
Since the beginning of 2023, the company has seen a solid revenue growth driven by digital sales and I believe we will see higher margins and better revenue numbers in the coming months. CMG is one of the best restaurant stocks to buy.
CMG stock is at $1,837 at time of writing and up 33% year-to-date. However, it is still lower than the 52-week high of $2,175. You will be paying a premium for the stock but looking at the company’s strong balance sheet, it could be worth it.
On the date of publication, Vandita Jadeja did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
