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3 Restaurant Stocks to Buy After Fantastic Q1 2021 Updates

By Nicholas Rossolillo - May 7, 2021 at 7:54AM

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These three chains are doing well in the wake of the pandemic.

The economy is roaring back, and consumers are out in force. The hiatus many people put on eating out is rapidly coming to an end, sending shares of restaurant chains higher.

Texas Roadhouse (TXRH 2.05%), Wingstop (WING 1.58%), and Yum China (YUMC -0.41%) have cracked the code to operating a healthy business in the post-COVID-19 world and are thriving. Here's why each is a solid long-term buy after first quarter 2021 earnings.

People toasting over a table of food.

Image source: Getty Images.

A suburbia family dining favorite

First, I'd like to start off by offering my condolences to the family and friends of Texas Roadhouse founder and former CEO Kent Taylor. I never met Mr. Taylor, but his no-nonsense yet insightful style on quarterly restaurant updates will be missed. The best way I have to pay my respects to Mr. Taylor is to talk about the exceptional dining business he built over the decades. 

Texas Roadhouse was started in 1993 and has grown into a leader in the family casual dining segment. There were 540 company-owned locations and another 97 franchised stores in operation at the end of the first quarter -- primarily in suburban and rural areas of America. Leading up to the pandemic, Texas Roadhouse had a dilemma at some of its busiest restaurants: It was facing capacity constraints with dining rooms filled to the brim.

To-go orders have never been a significant part of Roadhouse's business model, but the chain adapted, and the pandemic has resulted in a thriving to-go and meal kit business. To-go sales were 22% of average weekly store sales in the first quarter -- dining room capacity problem solved.  

As a result, Texas Roadhouse has continued to outperform most of its peers in the last year. In fact, comparable-store sales (or "comps") were 8.6% higher in the latest quarter compared to 2019 (before the pandemic). And in the month of April, comps were 20.9% higher than the same month in 2019. Sales and earnings are back to reaching new all-time highs, and the company is expanding again with 25 to 30 new stores expected to open this year.

After the last quarterly update, shares trade for 30 times trailing 12-month free cash flow -- a metric that will improve dramatically this year as Roadhouse laps the depressed financial reports of 2020. Thus, the restaurant concept Mr. Taylor built looks like a great long-term value right now. I remain a buyer of the steakhouse chain as it continues to grow at a steady clip.  

Chicken wings taking flight

Wingstop is a totally different take on the restaurant industry. The fast-casual and takeout chicken wing chain's 1,579 stores at the end of March are primarily franchised here in the U.S., but this is still an aggressive growth play. Management says it expects total sales growth of at least 11% this year as it expands the number of stores in operation. Wingstop opened 41 net new locations in the first quarter alone and signed a franchise agreement to open 100 restaurants in Canada.

In addition to expanding its footprint, the company is also forecasting continual growth in comps. In fact, domestic comps were up 20.7% year over year last quarter -- impressive as the pandemic actually helped Wingstop since most of its sales are for pickup and delivery. Comps are thus headed for their 18th straight year of increases, which helps make stores more efficient and profitable as the same kitchens are being used to crank out more wings.  

Case in point: Due to the rise in comps, adjusted EBITDA grew 46% in the quarter to $23.9 million. This run looks likely to continue in the years ahead as Wingstop opens new stores to double down on its success as a takeout specialist here in the States, and it has plenty of expansion potential overseas as well.  

This is one of those few restaurant chains that was built for the digital age. Wingstop shares trade for over 75 times trailing 12-month free cash flow, but it's not an unreasonable premium given its fast growth and even more impressive bottom-line expansion. This chicken wing brand is definitely worth keeping on your radar at the very least.  

The largest restaurant loyalty program in the world

For our last stock, we're headed to the other side of the Pacific to pay a visit to what is already one of the largest restaurant companies on the planet: Yum China. It's the sole licensee of KFC, Pizza Hut, and Taco Bell in Mainland China following its split from former parent company Yum! Brands, but Yum China has several wholly-owned subsidiary brands as well.

Normally, I shy away from business models that are so dependent on another company to generate value (in this case, licensing of the valuable Yum! Brands fast-food properties, KFC in particular being the most popular restaurant name in China). However, Yum China has built a unique competitive advantage -- it has relative autonomy to tweak Yum! Brands' store and menu concepts as it pleases to cater to Chinese consumers.

And along the way, it has built an incredible following. Its digital business is one of the largest in the world, in fact the largest among restaurants with app membership for KFC and Pizza Hut alone totaling over 315 million and counting as of the end of March. You heard that right. The number of KFC and Pizza Hut rewards members in China is just shy of the population of the entire U.S.  

It's a big number, but China has over 1.4 billion people and a developing middle class. Growth for Yum China is thus far from over. It has a goal to nearly double its current store count (10,725 at the end of March) to 20,000 this decade and benefits from steady comps growth at KFC and its wholly-owned subsidiaries. Yum China is also well on its way to recovery from the pandemic (owing to the fact that a staggering 84% of sales were digital in the latest quarter), and overall sales are back in growth mode as new locations open.  

Shares trade for about 29 times trailing 12-month free cash flow, a figure that will likely improve this year along with other restaurants as Yum China laps 2020 financial results. This is a great long-term growth story trading for a reasonable valuation. I remain bullish on China's top eating-out stock.

Nicholas Rossolillo owns shares of Texas Roadhouse and Yum China Holdings, Inc. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Texas Roadhouse. The Motley Fool recommends Wingstop. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
TXRH
$94.08 (2.05%) $1.89
Wingstop Stock Quote
Wingstop
WING
$137.78 (1.58%) $2.14
Yum China Holdings, Inc. Stock Quote
Yum China Holdings, Inc.
YUMC
$48.07 (-0.41%) $0.20
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$118.16 (0.38%) $0.45

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