Please ensure Javascript is enabled for purposes of website accessibility

3 Top Restaurant Stocks to Watch in February

By Chris Neiger, Anders Bylund, and Steve Symington – Updated Apr 25, 2019 at 3:39PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Don't overlook the moves these companies are making right now.

There's no denying that the restaurant industry can be a challenging sector to invest in. Ever-changing consumer habits mean that restaurants have to anticipate consumer preferences and quickly retool their strategies when things don't work out as planned.

To help investors sift through this industry and find some of the top companies, we asked three Motley Fool contributors for restaurant stocks they think investors should keep a close eye on right now, and they mentioned Carrols Restaurant Group (TAST), Chipotle (CMG 4.78%), and Texas Roadhouse (TXRH 1.69%). Here's why.

Check out the latest Texas Roadhouse, Chipotle, and Carrols earnings call transcripts.

Group of people sitting at table eating.

Image source: Getty Images.

A better way to invest in Burger King

Anders Bylund (Carrols Restaurant Group): The largest Burger King franchisee group in the world is arguably a better way to invest in that burger chain than the brand's own parent company, Restaurant Brands International (QSR 2.09%).

Carrols is growing its trailing earnings by 28%, while Restaurant Brands' bottom-line profit is heading 60% lower. Both companies have enjoyed solid top-line revenue growth in recent years, but Carrols is making far larger investments to expand its store network. Yes, that automatically boosts Restaurant Brands' corporate reach as well, but franchisees typically keep a larger percentage of the resulting bottom-line increases than the brand manager does.

In particular, Carrols is a much cleaner Burger King investment, since Restaurant Brands also runs the Tim Hortons and Popeyes brands. So if you like the brewhouse burgers and innovative beverage options you see at Burger King these days, Carrols lets you invest in that revamped menu without dragging Tim Hortons' and Popeyes' more sluggish growth trends along for the ride.

Above all else, this looks like a great time to pick up shares of Carrols Restaurant Group. Share prices have fallen 44% over the last six months despite the solid growth and optimistic expansion plans noted earlier. The stock is trading at just 4.2 times the group's trailing free cash flows. In my book, that's a tasty deal for Carrols.

Chipotle's turnaround is just warming up

Steve Symington (Chipotle Mexican Grill): With shares of Chipotle up 86% over the past year and its turnaround gaining steam, it's admittedly tempting to avoid the fast-casual burrito maker for fear a pullback is inevitable. But while that's certainly a possibility, I think it would be a huge mistake to assume Chipotle can't run even higher.

For perspective, shares most recently rallied earlier this month after the company posted better-than-expected fourth-quarter results, including 10.4% revenue growth supported by a 6.1% increase in comparable-restaurant sales. But most exciting from an investor's perspective, those comps climbed thanks to a combination of a 3.3% benefit from menu price increases and a 2% bump in transactions -- with the latter (transactions) metric marking a return to growth after more than a year of declines. What's more, Chipotle was able to leverage this comps growth to expand restaurant-level operating margin by 2.1 percentage points to 17% for the quarter. 

Of course, some investors immediately balked at Chipotle's results given its seemingly rich valuation, particularly considering the company "only" expects mid-single-digit comparable-restaurant sales growth and plans to open "just" 140 to 155 new locations in 2019 (which would increase its restaurant base by roughly 6%). Indeed, shares currently trade at a whopping 95 times trailing 12-month earnings. But they seem much more reasonable looking forward at around 39 times this year's expected earnings. And given its recent habit of underpromising and overdelivering, I suspect Chipotle's guidance for the coming year could prove conservative as the company drives incremental sales and profits through initiatives like its "Chipotlane" drive-thru lanes, operational improvements, digital orders, and delivery. At the very least, then, I think investors would do well to add Chipotle to their watch lists this month.

This restaurant is on the road to more growth

Chris Neiger (Texas Roadhouse): Texas Roadhouse's stock price has seen its share of volatility over the past year, but despite the roller-coaster ride, shares are up 12% over the past 12 months -- compared to just 3% gains for the S&P 500.

The company released strong fourth-quarter results this week, with comparable-restaurant sales increasing 5.6% year over year and diluted earnings per share ticking up 5.4% to $0.42. Management said in a press release that the company's increase in total revenue, which popped 11% in the quarter, mixed with a lower tax rate, helped earnings grow in the fourth quarter. These figures mean that Texas Roadhouse ended 2018 with double-digit sales growth in both the fourth quarter and the full year.

Management also noted in the Q4 press release that Texas Roadhouse has had 36 consecutive quarters of positive comparable-restaurant sales. That's impressive consistency, and there may be even more good news ahead for the company. Texas Roadhouse plans on opening up to 30 new restaurants this year, which could help drive sales higher.

There will likely be some volatility ahead in the short term for Texas Roadhouse, but the company is consistently increasing its comparable-restaurant sales and is expanding its restaurant footprint significantly this year. If it can successfully manage both of those opportunities, Texas Roadhouse may continue to be a bright spot in the restaurant industry.

Anders Bylund has no position in any of the stocks mentioned. Chris Neiger has no position in any of the stocks mentioned. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Texas Roadhouse. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
CMG
$1,626.96 (4.78%) $74.24
Texas Roadhouse Stock Quote
Texas Roadhouse
TXRH
$99.32 (1.69%) $1.65
Carrols Restaurant Group Stock Quote
Carrols Restaurant Group
TAST
$1.49 (%)
Restaurant Brands International Stock Quote
Restaurant Brands International
QSR
$66.35 (2.09%) $1.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
371%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.