Restaurant stocks have been a great place to invest in recent years. The S&P 1500 Restaurants index outperformed the S&P 500 return over the last one, three, and five years. More people are dining out these days, which points to more growth for the industry.
If your portfolio needs some extra flavor, three Motley Fool contributors have done the hard work for you and gathered some important details about three restaurant stocks they think have potential. Here's why they believe more gains are in store for Chipotle Mexican Grill (CMG 6.33%), Wingstop (WING 1.97%), and Restaurant Brands International (QSR -0.75%).
1. Nothing stops this winning restaurant stock
Jennifer Saibil (Chipotle Mexican Grill): Chipotle Mexican Grill has been humming along since the start of the pandemic, posting consistent double-digit revenue growth and robust profitability.
CMG Revenue (Quarterly) data by YCharts
Comparable-store sales (comps) have been strong as well, increasing 7.6% year over year in the 2022 third quarter, or about average for Chipotle.
Like many companies looking to cover higher costs in the inflationary environment, Chipotle Mexican Grill hiked prices in 2022. The move didn't seem to bother its customer base and contributed to the increased Q3 revenue. Revenue was up 13.7% year over year in Q3, and earnings per share rose from $7.18 to $9.20.
Along with healthy comps growth and higher prices, Chipotle is aiming for increased store expansion. Management had previously set an overall goal of 6,000 locations worldwide, but it has upped that total to 7,000. Chipotle operated 3,100 stores as of the end of the 2022 third quarter. It plans to open 255 to 285 stores in 2023, and at that rate, it has many years of store openings ahead before it reaches its goal.
In general, I like to point out flaws in a company model or any other business risks, but there isn't anything problematic that stands out about Chipotle. It has strong management, a resilient customer base, a proven model, and a long expansion runway. Nothing is a guarantee, but Chipotle comes close. Typically, these kinds of companies with demonstrated worth that look like "guarantees" fall into the "value stock" category. But Chipotle has dramatically outperformed the S&P 500, gaining more than 350% over the past five years versus 44% for the index.
Chipotle has the same potential to outdo the market going forward. It's still down 6% over the past year, but that's unlikely to continue, making now as good a time as ever to buy shares.
2. A simple recipe for success
Jeremy Bowman (Wingstop): In the restaurant industry, less is often more. Take Wingstop, for example.
The fast-food company has a simple menu focusing on chicken wings. It operates out of small-footprint locations in "B" real estate with a focus on takeout and delivery that helps the company save on costs and give customers what they want: hot, tasty chicken wings in the comfort of their own home.
There's no question that that business model has been a recipe for success. Though Wingstop doesn't get the attention of larger restaurants like Chipotle or Starbucks, the company is one of the fastest-growing restaurant chains (and stocks) out there.
The stock is up 400% since its 2015 initial public offering, has put up 18 straight years of same-store sales growth through both the financial crisis and the pandemic, and it continues to deliver smashing results. Domestic same-store sales were up 6.9% in its third quarter and systemwide sales rose 18% as it continues to expand its footprint, and earnings per share rose 18% to $0.45.
What also makes Wingstop attractive is its long-term growth plan. Company management sees room in the market for 7,000 global restaurants, up from less than 2,000 today, and it continues to grow average unit volumes, with a target of $2 million, up from $1.6 million currently. The chain franchises most of its restaurants, and its model is popular with franchisees due to the simple menu and small footprint, making Wingstop one of the cheaper franchises to open.
The company still has relatively low brand awareness, giving it upside potential as more customers become familiar with it, and it's ramping up sales through digital and delivery channels, a natural fit for the takeout-focused chain.
Given its track record of success and its growth potential, the stock looks well positioned to be a long-term winner.
3. Undervalued growth potential
John Ballard (Restaurant Brands International): The quick-service restaurant industry has weathered the macroeconomic headwinds relatively well over the last year thanks to convenience, investments in digital ordering, and affordable menu items in a period of high inflation. Restaurant Brands International is the owner of several top brands, including Tim Hortons, Burger King, Popeye's Louisiana Kitchen, and Firehouse Subs. It has reported stellar financial results in recent quarters, and the stock has started to climb after underperforming over the last five years.
The company is firing on all cylinders right now after reporting comparable sales growth of 9% over the last two quarters. Tim Hortons continued to see strong sales from the release of Loaded Bowls in June, among other menu items, while Burger King saw strong results from its core value item, the Whopper, and the launch of the Burger King Royal Crispy Chicken.
Last year, management announced a new Reclaim the Flame initiative for Burger King. This plan calls for investing $400 million over two years to improve the marketing message, upgrade kitchen equipment, and remodel stores to deliver a better experience to customers. While these investments will ding the company's profits through 2024, management expects additional profit contributions starting in 2025 and beyond.
Another reason to like Restaurant Brands is the international growth opportunity. The company just recently opened its first four locations in India, while seeing continued growth in the Middle East and the Philippines. Since 2014, when Restaurant Brands was formed from the merger of Tim Hortons and Burger King, the company has expanded to seven new countries, but there is still a deep pipeline of long-term deals to penetrate markets around the world.
The stock is reasonably valued at 21 times earnings, which is a slight premium to the market average. However, Restaurant Brands sweetens the deal by paying out most of its free cash flow to shareholders with an above-average dividend yield of 3.28%.
Solid execution, strong growth in a tough economic environment, and opportunities for international expansion could send the stock soaring over the next five years.
