Restaurants are go-to meeting hubs for friends, family, and colleagues. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough. This makes spending somewhat unpredictable and has held back the industry over the past six months as its 3.7% gain has trailed the S&P 500 by 5.2 percentage points.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one restaurant stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Restaurant Stocks to Sell:
Restaurant Brands (QSR)
Market Cap: $25.64 billion
Formed through a strategic merger, Restaurant Brands International (NYSE: QSR) is a multinational corporation that owns three iconic fast-food chains: Burger King, Tim Hortons, and Popeyes.
Why Does QSR Fall Short?
- Estimated sales growth of 3.4% for the next 12 months implies demand will slow from its seven-year trend
- Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 1.6 percentage points
- Earnings growth over the last seven years fell short of the peer group average as its EPS only increased by 6% annually
At $73.46 per share, Restaurant Brands trades at 17.9x forward P/E. Check out our free in-depth research report to learn more about why QSR doesn’t pass our bar.
BJ's (BJRI)
Market Cap: $1.09 billion
Founded in 1978 in California, BJ’s Restaurants (NASDAQ: BJRI) is a chain of restaurants whose menu features classic American dishes, often with a twist.
Why Should You Dump BJRI?
- Lackluster 3.2% annual revenue growth over the last seven years indicates the company is losing ground to competitors
- Projected sales growth of 2.9% for the next 12 months suggests sluggish demand
- Lacking pricing power results in an inferior gross margin of 15.1% that must be offset by turning more tables
BJ's is trading at $54.62 per share, or 22.1x forward P/E. To fully understand why you should be careful with BJRI, check out our full research report (it’s free).
One Restaurant Stock to Watch:
Dutch Bros (BROS)
Market Cap: $8.92 billion
Started in 1992 by two brothers as a single pushcart, Dutch Bros (NYSE: BROS) is a dynamic coffee chain that’s captured the hearts of coffee enthusiasts across the United States.
Why Is BROS Interesting?
- Rapid rollout of new restaurants to capitalize on market opportunities makes sense given its strong same-store sales performance
- Average same-store sales growth of 5.8% over the past two years indicates its restaurants are resonating with diners
- Free cash flow margin expanded by 2.8 percentage points over the last year, providing additional flexibility for investments and share buybacks/dividends
Dutch Bros’s stock price of $70.50 implies a valuation ratio of 65.5x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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