The restaurant industry was all but crushed by the COVID-19 pandemic after indoor dining was halted and takeout orders and delivery were the only source of revenue.
Being allowed to reopen was a minor salve on the wound as capacity limitations meant restaurant volumes could not recover and dozens of chains went bankrupt. Outdoor seating helped some, but the onset of cold winter weather has severely curtailed that option.
After the horrendous year, Goldman Sachs analyst Jared Garber initiated coverage of the industry with an overall bullish outlook, expecting large chains in particular to benefit from the economy reopening this year and increased consumer spending that should follow.
The "rapid digital transformation and independent restaurant challenges" ought to lift those restaurants higher, but there is still caution as only eight of his 15 picks were rated buys. The rest carried either neutral ratings or were marked as stocks to sell. Below we'll take a closer look at the list of winners and losers and see whether the industry optimism is warranted.
Almost a quarter of Garber's restaurant stocks were rated neutral, mostly because of valuation. The tailwinds he sees pushing the industry higher this year have already been priced into their stocks.
- Cheesecake Factory ($37 price target): The analyst says the upside is already baked in for Cheesecake Factory (NASDAQ:CAKE), which has nearly tripled from its lows and trades at nearly $50 a share.
- Shake Shack ($107): Better-for-you burger shop Shake Shack (NYSE:SHAK) already carries a "high" valuation after its stock has rallied nearly 285% from its March-lows to $125 per share. Garber says Shake Shack will likely see sales volatility in the immediate future.
- Texas Roadhouse ($79): The analyst says steakhouse chain Texas Roadhouse (NASDAQ:TXRH) is up 32% since the beginning of 2020, and with shares 143% higher from where they crashed to in March, its $79-per-share price makes it fairly valued.
- Wendy's ($23): Among the Neutral-rated stocks, the analyst sounds most hopeful about Wendy's (NASDAQ:WEN), as he believes its loyal customer base can help lift it this year, but competitive headwinds could ultimately hold it back. At around $20 per share, Wendy's trades slightly below his target.
On the outs
Even though some of the biggest restaurant operators populate Garber's sell list, they also face some of the toughest competitive hurdles while being weighed down by potential anchors.
- Bloomin' Brands ($20): Outback Steakhouse parent Bloomin' Brands (NASDAQ:BLMN) will suffer from a slower recovery in Brazil, while its high valuation and competitive pressure will weigh against its stock.
- Restaurant Brands International ($60): Burger King and Tim Hortons will weigh on Restaurant Brands International (NYSE:QSR) and the latter chain's international expansion strategy is suspect. The galloping growth enjoyed at Popeyes Louisiana Kitchen goes unmentioned, but the $60-per-share stock is fairly valued.
- Yum! Brands ($103): Although Yum! Brands (NYSE:YUM) had a strong 2020, Garber doubts it can maintain the momentum this year and its KFC, Pizza Hut, and Taco Bell brands will face competitive headwinds.
The rising tide
The Goldman Sachs analyst thinks these battered restaurant chains will hit the ground running in 2021, with their size and strength carrying them higher. Mostly, though, it's their digital investments that will win the day.
- Brinker International ($65): Chili's and Maggiano's Little Italy will lift Brinker International (NYSE:EAT) because it initiated a digital-only concept to leverage their underutilized kitchens and improve their restaurant-level economics. Brinker trades at $63 a share.
- Darden Restaurants ($136): Darden Restaurants (NYSE:DRI) is seen as one of the biggest beneficiaries of the expected economic recovery as the casual dining space should gain share as independent outlets shut down, consumers start spending, and business travel resumes. Darden trades just under $122 per share.
- Domino's ($425): Because pizza shop Domino's Pizza (NYSE:DPZ) has built an "industry-leading digital and technology moat" and its franchisees are among the strongest in the restaurant industry, the chain should rise well above its current $377-per-share price.
- Jack in the Box ($111): Fast food chain Jack in the Box (NASDAQ:JACK) might not be one that immediately pops to mind, but Garber says improving fundamentals, better franchisee economics, and management's focus on franchisees will combine for the chain to see unit growth accelerate. Jack in the Box currently goes for around $93 per share.
- McDonald's ($237): The sheen will be restored to McDonald's (NYSE:MCD) golden arches because of its investments in technology, renewed marketing, customer loyalty, and menu innovation. All should combine to drive its market share higher, as well as its stock, which sits at $207 per share.
- Starbucks ($115): Starbucks (NASDAQ:SBUX) has long been known for its digital prowess, but it will be the return to normalcy and consumers renewing their traditional routines that will push the coffee shop and its $98-per-share stock higher.
- Wingstop ($165): Chicken wing joint Wingstop (NASDAQ:WING) is seen as a chain in the early innings of a long-term growth story where it has developed a "strong, digitally focused foundation to support unit growth," as well as its $155-per-share stock price.
One restaurant to rule them all
While the Goldman Sachs analyst was bullish about the restaurant industry in general, and several segments of it in particular, no restaurant caught his eye more than Chipotle Mexican Grill (NYSE:CMG), which he ranked as his "conviction buy," setting a $1,650-per-share price target.
The Mexican-food chain is his top stock idea of 2021 and he writes in his research note to investors that Chipotle is emerging from the COVID-19 pandemic as a digital leader with a strong operational foundation for growth. Having narrowed its menu that was already renowned for healthful eating, Chipotle Mexican Grill's stock of $1,466 per share has at least 10% more upside.
Garber seems to have his finger correctly affixed to most of the restaurant industry's pulse, though I could see Popeyes helping Restaurant Brands International over the roadblocks Tim Hortons might impose, or Taco Bell improving Yum! Brands' chances.
If these chains made it through 2020 mostly intact, then the restaurant industry ought to be able to rise once more in 2021 as consumers decide dining out is an activity they really desire most.