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Restaurant Picks Analyzed: Buy, Hold, or Sell?

Despite challenges, the restaurant industry is poised for growth thanks to rising demand and the popularity of innovative delivery models. Thus, let us analyze whether to Buy, Hold, or Sell leading restaurant stocks Nathan’s Famous (NATH), McDonald’s (MCD) and Shake Shack (SHAK)...

With a strong emphasis on delivery, takeout, and technological innovation, the restaurant industry is poised for robust growth this year. So, quality restaurant stocks Nathan’s Famous, Inc. (NATH) could be an ideal buy. However, I think it could be best to wait for a better entry point in McDonald’s Corporation (MCD) and avoid Shake Shack Inc. (SHAK).

The National Restaurant Association 2024 State of the Restaurant Industry Report predicts that restaurant sales will soar beyond $1.1 trillion this year, representing a significant milestone for the industry.

Michelle Korsmo, President & CEO of the National Restaurant Association, emphasizes the industry's resilience and adaptability in the face of challenges, contributing to its continued growth and community impact.

Additionally, the popularity of delivery and takeout options underscores the crucial role restaurants hold in consumers' daily routines. Furthermore, there's anticipation that technology will transform front-of-house operations industry-wide.

A notable 73% of diners recognize the benefits of technology in enhancing their dining experience. This year is poised to see a surge in the implementation of digital menus and ordering systems, frequently integrated with customer-facing tablets or mobile applications.

Moreover, tech investment is increasing to improve sales, ordering, employee management, and customer service, ensuring sustainability and profitability. Also, contactless methods and healthier menu options are becoming popular amid rising health consciousness.

The United States full service restaurants market is predicted to reach $554.12 billion by 2029, increasing at an 11.2% CAGR.

On top of it, the growth of the US fast-casual restaurant market is fueled by increasing consumer demand for affordable, speedy, and healthier meal options. In addition, many fast-casual restaurants cater to dietary restrictions like gluten and lactose-free options, expanding their customer base.

Considering these conducive trends, let's take a look at the fundamentals of the three Restaurants stocks.

Stock to Buy:

Nathan’s Famous, Inc. (NATH)

NATH is a licensor, wholesaler, and retailer of Nathans brand products, notably Nathans Beef Hot Dogs. The company’s segments include Branded Product Program; Product licensing; and Restaurant operations. Its products are available in approximately 79,000 locations.

NATH’s trailing-12-month EBIT and EBITDA margins of 23.44% and 24.31% are 212% and 122.8% higher than the industry averages of 7.51% and 10.91%, respectively.

On December 1, NATH paid a quarterly dividend of $0.50 per share. NATH pays a $2.00 per share dividend annually, which translates to a 2.94% yield on the current price level. Its dividend has grown at a 21.7% CAGR over the past five years.

During the fiscal third quarter that ended December 24, 2023, NATH’s total revenues increased 3.3% year-over-year to $28.89 million. Its income from operations came in at $5.14 million. Moreover, the company’s net income and income per share stood at $2.61 million and $0.64 for the quarter, respectively.

Shares of NATH have gained 3% over the past three months, closing the last trading session at $67.97.

NATH’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

NATH has an A grade for Quality and a B for Sentiment. It has ranked #1 in the 43-stock Restaurants industry.

To access NATH’s additional Growth, Value, Momentum, and Stability ratings, click here.

Stock to Hold:

McDonald’s Corporation (MCD)

MCD operates and franchises McDonald’s restaurants. The company’s restaurants offer a variety of locally suitable food and beverages. Its eateries are owned and operated by local entrepreneurs. Its segments include the United States; International Operated Markets; and International Developmental Licenced Markets & Corporate.

MCD’s trailing-12-month EBIT margin of 46.07% is 513.1% higher than the industry average of 7.51%. But its trailing-12-month asset turnover ratio of 0.48x is 51.5% lower than the 0.99x industry average.

On February 7, MCD declared a quarterly cash dividend of $1.67 per share of common stock, payable on March 15, 2024. The company pays an annual dividend of $6.68, which yields 2.32% on the current market price.

MCD’s revenues for the fourth quarter ended December 31, 2023, increased 8.1% year-over-year to $6.41 billion. Its operating income rose 8.5% over the prior-year quarter to $2.80 billion. The company’s non-GAAP net income increased 12.7% year-over-year to $2.14 billion. Also, its non-GAAP EPS came in at $2.95, representing an increase of 13.9% year-over-year.

Street expects MCD’s revenue to increase 4.9% year-over-year to $6.19 billion for the fiscal first quarter ending March 2024. The company’s EPS for the same quarter is estimated to rise 4% from the prior-year quarter to $2.73.

While the stock has gained 8.1% over the past year, it has plummeted 2.7% over the past nine months to close the last trading session at $288.17.

MCD’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary rating system.

MCD has a C grade for Growth, Sentiment, and Momentum. It is ranked #11 within the same industry.

In addition to the POWR Ratings highlighted above, one can see MCD’s Value, Quality, and Stability ratings here.

Stock to Sell:

Shake Shack Inc. (SHAK)

SHAK is the owner, operator, and licensor of Shake Shack restaurants. The company’s offerings include hamburgers, hot dogs, chicken, shakes, beer, wine, and other products.

SHAK’s trailing-12-month EBIT and net income margins of 0.36% and 0.22% are both 95.2% lower than the industry averages of 7.51% and 4.70%.

In the first fiscal fourth quarter ended December 27, 2023, SHAK’s operating loss amounted to $1.30 million. Its total expenses increased 17.4% year-over-year to $287.54 million. Adjusted EPS amounted to $0.02.

Analysts expect SHAK’s EPS and revenue to come in at $0.02 and $288.74 million in the fiscal first quarter ending March 2024.

The stock has gained 1.6% over the past six months to close its last trading session at $78.07.

The POWR Ratings reflect SHAK’s bleak prospects. The stock has an overall D rating, equating to Sell in our POWR Ratings system.

SHAK has a D grade for Value and Quality. It is ranked #37 in the same industry.

Click here to see additional POWR Ratings for SHAK (Growth, Momentum, Sentiment, and Stability).

What To Do Next?

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10 Stocks to SELL NOW! >

NATH shares were trading at $67.09 per share on Thursday morning, down $0.88 (-1.29%). Year-to-date, NATH has declined -14.00%, versus a 5.21% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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