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These 3 Restaurant Stocks Are Selling at Bargain Prices

By Daniel B. Kline - Mar 27, 2020 at 9:45AM

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Expect a major recovery in the share price for these well-run companies once the COVID-19 pandemic resolves itself.

The COVID-19 pandemic has caused a number of stocks to drop significantly in price even while the companies behind them have shown their strength. That has even happened for three major restaurant chains that remain in operation during the broader economic shutdown and the financial conditions of each have shown that these companies are built for long-term success.

When a company sees its share price drop just because the broader market has fallen and not because of anything it has specifically done, that makes it a strong candidate for a quick comeback. These three restaurant chains have been leading the fight to keep their customers fed during the pandemic, and they will bounce back quickly once the world returns to normal.

The exterior of a McDonald's.

Image source: McDonald's.

1. McDonald's

McDonald's (MCD -0.09%) has invested heavily in delivery, and that has paid off as the coronavirus pandemic has essentially served as an ad for the service.

"In just three years, McDelivery has gone from generating $1 billion in sales for McDonald's company and franchise restaurants to over $4 billion in sales this past year," CEO Chris Kempczinski said in the fourth-quarter earnings call.

The coronavirus has forced more people to try delivery. Once they do and have a good experience, they will likely continue to use it after the pandemic passes and restaurant dining rooms reopen.

McDonald's consumers who order delivery also spend more (probably at least partly because the shame of adding a shake or getting two orders of fries is removed). Adding more delivery orders should help the chain build its stock back from $162.98 a share before the market opened on March 26 to closer to its 52-week high of $221.93 a share.

2. Domino's

Domino's (DPZ 1.20%) may actually see its sales rise during the pandemic because the company did not have to change much at all to continue to serve its customers. The chain already had a business model built around delivery supplemented by consumers' picking up in its stores. It had no dining rooms to close and has almost certainly picked up customers as some local pizza places have closed during the pandemic.

Shares in the pizza company sat at $321.45 each before the market opened on March 26, about $50 below the 52-week high of $381.86 a share. That's likely to change as Domino's will be one of the few companies that could report a same-store sales gain in its next quarter.

That's not a guarantee. Some communities have closed down, and parts of the world have moved into full lockdown. That could constrain sales, but it's very likely that Domino's will post very strong numbers compared with most businesses, and it will revert to normal quickly, mostly because it's more or less operating normally now.

3. Starbucks

Starbucks (SBUX 0.23%) hasn't been a "third place" (after home and work) for people to hang out since this crisis began. It has had to close its dining rooms in the United States and had widespread closures in China. That's going to have a major effect on its sales and has depressed its stock price per share to $65.81, down from its 52-week high of $99.72 a share.

Once the coronavirus threat passes, however, customers will return. People will want to socialize and to treat themselves in affordable ways. Starbucks offers an opportunity to do both, and it represents normalcy to many people. That will help the chain come roaring back even if the pandemic creates a lingering drag on the economy or even a recession.

Don't call it a comeback

All three of these chains have seen their share prices fall due to broader market conditions and temporary overall negativity. Once social distancing ends and people get back to normal, confidence will grow in these stocks.

Nothing has fundamentally changed for any of these three brands. They're being dragged down by broad sentiment and, potentially, a short-term sales drop. That will change once this pandemic passes.

Daniel B. Kline owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$266.58 (-0.09%) $0.24
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$88.55 (0.23%) $0.20
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
DPZ
$416.95 (1.20%) $4.96

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