Despite economic challenges in the near term, the restaurant industry’s long-term outlook remains strong. Moreover, restaurants are increasing their tech spending to adapt to changing consumer preferences and streamline operations.
So, investors looking for quality restaurant stocks can consider buying McDonald’s Corporation (MCD). However, fundamentally weak Red Robin Gourmet Burgers, Inc. (RRGB) might be best avoided.
According to a Nation’s Restaurant News survey, 9 out of 10 restaurant owners want to expand their investments in technology in the coming year as they focus on improving employee productivity, operational efficiency, and customer experience.
The food service market is anticipated to grow at a CAGR of 6.3% until 2027. Fast food restaurants provide quick service and typically feature a drive-through option, making them popular among time-crunched consumers.
However, the pandemic has significantly impacted the restaurant industry, disrupting global supply chains and causing economic upheavals. While certain concerns have begun to fade, supply chain issues are anticipated to persist through 2023.
Let’s delve deeper into the fundamentals of the stocks.
Stock to buy:
McDonald’s Corporation (MCD)
MCD operates and franchises its restaurants in the United States and internationally. The company’s segments include the United States (U.S.); International Operated Markets (IOM); and International Developmental Licensed Markets & Corporate (IDL).
MCD’s trailing-12-month ROTA of 13.22% is 239.7% higher than the industry average of 3.89%. Its trailing-12-month EBIT margin of 45.41% is 516.7% higher than the industry average of 7.36%.
For the first quarter ended March 31, 2023, MCD’s revenues increased 4% year-over-year to $5.90 billion. Its non-GAAP net income rose 13.5% over the prior-year quarter to $1.94 billion.
Also, its non-GAAP EPS came in at $2.63, representing an increase of 15.4% year-over-year. The company’s operating income increased 9.5% year-over-year to $2.53 billion.
Analysts expect MCD’s revenue to increase 8% year-over-year to $25.03 billion in 2023. Its EPS is expected to grow 9.9% year-over-year to $11.09 in 2023. It surpassed EPS estimates in all four trailing quarters. MCD’s stock has gained 23.7% over the past year to close its last trading session at $289.35.
MCD’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MCD has an A grade for Sentiment and Quality and a B grade for Momentum, Growth, and Stability. Within the A-rated Restaurants industry, it is ranked #5 out of 45 stocks. Click here for the additional POWR Ratings for Value MCD.
Stock to avoid:
Red Robin Gourmet Burgers, Inc. (RRGB)
RRGB, together with its subsidiaries, develops, operates, and franchises casual dining restaurants in North America and one Canadian province.
RRGB’s forward EV/EBITDA multiple of 12.64 is 36.2% higher than the industry average of 9.28. Its forward Price/Book multiple of 41.74 is significantly higher than the industry average of 2.06.
RRGB’s trailing-12-month gross profit margin of 15.47x is 56% lower than the 35.15x industry average. Its trailing-12-month EBITDA margin of 4.29% is 60.6% lower than the 10.90% industry average.
For the fiscal fourth quarter that ended December 25, 2022, RRGB’s loss from operations increased 123.1% year-over-year to $39.42 million. Its net loss and loss per share came in at $44.20 million and $2.78, up 107.4% and 104.4% year-over-year, respectively.
RRGB’s revenue is expected to decrease marginally year-over-year to $293.30 million for the quarter ending June 30, 2023. Its EPS is expected to come in at negative $0.44 for the same period. The stock has gained marginally over the past month to close its last trading session at $14.08.
RRGB’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.
It is ranked #42 in the same industry. It has an F grade for Sentiment and a D for Stability and Quality. To see additional RRGB’s rating for Growth, Momentum, and Value, click here.
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MCD shares were trading at $286.30 per share on Tuesday afternoon, down $3.05 (-1.05%). Year-to-date, MCD has gained 9.27%, versus a 9.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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