From fast food to fine dining, restaurants play a vital societal role. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough, and the market seems to be baking in a downturn for the industry - over the past six months, it has pulled back by 16.4%. This drawdown is a stark contrast from the S&P 500’s 13% gain.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. Taking that into account, here is one restaurant stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Restaurant Stocks to Sell:
Krispy Kreme (DNUT)
Market Cap: $676.6 million
Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ: DNUT) is one of the most beloved and well-known fast-food chains in the world.
Why Do We Think DNUT Will Underperform?
- Earnings per share have contracted by 28.6% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Cash-burning history makes us doubt the long-term viability of its business model
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $3.93 per share, Krispy Kreme trades at 5.3x forward EV-to-EBITDA. To fully understand why you should be careful with DNUT, check out our full research report (it’s free for active Edge members).
Portillo's (PTLO)
Market Cap: $334.5 million
Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ: PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.
Why Should You Dump PTLO?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Investment activity picked up over the last year, pressuring its weak free cash flow margin of -0.9%
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Portillo's is trading at $4.68 per share, or 24.3x forward P/E. If you’re considering PTLO for your portfolio, see our FREE research report to learn more.
One Restaurant Stock to Watch:
Arcos Dorados (ARCO)
Market Cap: $1.53 billion
Translating to “Golden Arches” in Spanish, Arcos Dorados (NYSE: ARCO) is the master franchisee of the McDonald's brand in Latin America and the Caribbean, responsible for its operations and growth in over 20 countries.
Why Does ARCO Stand Out?
- Same-store sales provide a solid foundation for the steady expansion of its restaurants
- Customers are lining up to eat at its restaurants as the company’s same-store sales growth averaged 23.1% over the past two years
- Economies of scale give it more fixed cost leverage than its smaller competitors
Arcos Dorados’s stock price of $7.24 implies a valuation ratio of 0.3x forward price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
High-Quality Stocks for All Market Conditions
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