Investors have seen volatility soar in recent weeks thanks to fears about the novel coronavirus and its potential economic toll. Those swings have produced cheaper valuations for many high-quality businesses like restaurants, which rely on consumer spending.
Yet, while changing shopping behavior will dent growth in the short term, that's no reason to stay away from this industry that includes some attractive investment opportunities. Let's take a look at a few standout deals in the fast-food niche and see if any should be added to your menu.
1. Domino's Pizza: The delivery leader
Domino's Pizza (DPZ 1.79%) is the leading pizza delivery chain, responsible for 35% of sales in that niche sector last year. Years before it became a key growth strategy for the wider industry, the fast-food specialist poured resources into constructing a world-class e-commerce ordering and fulfillment platform. And that head start has paid off: Over 50% of its global retail sales came from digital channels in 2019.
Domino's isn't growing as quickly as it has been, mainly because a flood of home delivery competitors have stampeded into the market. Management predicted that the chain's operating trends would stabilize once most of those unsustainable business models shook out of the industry, and that's exactly what happened this past quarter. Domino's comps sped up in late 2019, helping propel robust earnings growth. The pizza giant's 20% dividend boost, meanwhile, is just one benefit of its extremely efficient operating model and attractive restaurant-level economics.
2. Dunkin' Brands: A coffee winner
Dunkin' Brands (DNKN) isn't growing as quickly as peers like Starbucks, but there are still some good reasons to like this stock. The coffee and snack specialist recently posted robust sales gains in the fourth quarter, which made 2019 its best operating performance in six years.
Revenue should continue rising thanks to the combination of modestly higher sales at existing locations and a quickly expanding store base. The chain is aiming for as many as 250 new launches in the U.S. just this year. And investors can expect to see rising operating margin over time as Dunkin' continues pushing into higher-quality food and drink options. It added espresso-based beverages in 2018 and more recently moved into cold brew drinks and plant-based meat sandwiches.
These shifts have helped push guest spending to new highs, and management sees plenty more opportunities to add to is appeal by raising its beverage and food game.
3. McDonald's: Buy the industry
A world-class business tends to have two major characteristics: cash-generating ability and a productive way to spend that cash. The combination of these factors can create a virtuous cycle of compounding returns for investors, and McDonald's (MCD -0.94%) looks like a case study of this powerful process at work.
The fast-food giant recently achieved its highest global growth rate in a decade, with comps rising 6% in the core U.S. market and across most of its international segments. Restaurant-level cash flow set an all-time high, too.
The chain is directing most of that extra cash toward store remodels that make it more attractive for consumer visits and more efficient as a home delivery hub. It also just concluded a market-leading cash return program that saw shareholders receive $25 billion in stock buybacks and dividend payments since 2016. With operating margin now near 45% of sales, this business should easily support additional growth initiatives and cash returns over the coming years.
Restaurant stock investor takeaway
Sure, each of these stocks is likely to endure volatility along with the wider market. Yet by focusing on their long-term business and financial advantages, investors have a better shot at constructing a strong portfolio that includes world-class restaurant stocks.