Most investors have heard the adage popularized by Wall Street legend Peter Lynch, "Buy what you know." For many, that translates to owning stock in the restaurant industry, where consumers have no shortage of opinions about what they like.
Unfortunately, growth rates in the sector have turned lethargic, with restaurant sales in 2019 growing at their slowest rate since 2010, making it more difficult for investors interested in the sector. The coming year is expected to be even more challenging, as consumers tend to stay home more during Presidential election years and for major events such as the Olympic Games.
Yet even as the overall industry turned sluggish, some well-known companies are bucking the trend, turning in stunning results for 2019 and setting themselves up for continued success in 2020. Let's look at why Chipotle Mexican Grill (CMG 0.35%) and Starbucks (SBUX -0.34%) might continue to be good investments in the year to come.
Image source: Chipotle.
1. Chipotle: Like a phoenix from the ashes
After several years of turmoil, Chipotle turned in a stellar performance in each of the past two years. The burrito purveyor's stock turned in 49% gains in 2018, solidly trouncing the 6% loss of the S&P 500. It followed that up with 94% gains in 2019, more than triple the 29% performance of the broader market. Yet after two highly successful years, analysis suggests Chipotle's run may be far from over.
The company has consistently delivered on a variety of metrics in 2019. Revenue grew 14% year over year through September, while its earnings per share nearly doubled. Chipotle opened a net 56 new locations for the first nine months of this year, ending September with 2,546 restaurants, while its average restaurant sales in the third quarter climbed nearly 9% year over year. Comparable-store sales also shined, growing by 11% in Q3 after notching 10% gains in each of the first two quarters. The company also announced that its Rewards program reached a milestone, topping 7 million members.
There are even more compelling reasons to believe Chipotle's strong growth will continue in 2020. The fast-casual Tex-Mex chain was named a top pick for 2020 by BTIG analyst Peter Saleh, who notes that the company's push in digital ordering is bearing fruit, with digital orders at some locations representing 40% of total sales. The stock was also upgraded to outperform (buy) this past week by Oppenheimer analyst Brian Bittner, who said digital and menu innovation will continue to boost Chipotle's results, getting the company closer to "peak sales and margins."
Image source: Starbucks.
2. Starbucks: A stunning turnaround
Starbucks went through its own difficulties over the past five years but has managed to pull off a successful turnaround. Revenue growth stalled to close out 2017 flat year over year, while comparable-store sales grew just 2%. The coffee purveyor began to turn things around in 2018, with revenue that grew 10% and comparable-store sales that eked out another 2% increase. The company worked to streamline activities, improve throughput, and address slowing growth in China. Those efforts are bearing fruit, driving Starbucks stock price up 37% in 2019, and the company shows no signs of slowing.
For the fiscal year ended Oct. 30, Starbucks reported revenue that grew 7% year over year, while operating income grew 5%. This was driven by comparable-store sales that increased 5%, with the average ticket up 3% and the number of transactions up 2%. Additionally, the store count grew by 3% to 18,067.
For the upcoming fiscal year, Starbucks is forecasting revenue growth of 7% at the midpoint of its guidance and operating income to increase by about 9%. The company is also guiding for comparable-store sales growth of 3% to 4%.
Analysts are getting more bullish about Starbucks as well. Barclays analyst Jeffrey Bernstein upgraded the stock to overweight (buy) from equal weight (hold), and increased its price target to $107, more than 20% higher than its current price. Bernstein noted that growth was driven by changes to its Starbucks Rewards program, specialty drinks like its Pumpkin Cream cold brew, and a recent initiative to retrain its baristas. Those efforts should continue to pay dividends in 2020.
