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Investing in Restaurant Stocks

By Timothy Green – Updated Jun 10, 2022 at 3:33PM

The restaurant industry was battered by the first year of the COVID-19 pandemic. While soaring demand for restaurant delivery helped keep the lights on, grocery stores scooped up spending on food as consumers pulled back on dining in. Restaurants already centered on delivery prospered in this environment, but many were left scrambling.

With the pandemic largely over in the minds of consumers, spending at restaurants has made a comeback. Throughout 2021 and into 2022, away-from-home food spending has outpaced spending at grocery stores. Success within the industry has been uneven. Some restaurants that thrived over the past two years are now running into some issues.

All restaurants are also facing a new set of problems, including labor shortages, cost inflation, and an uncertain economic environment that could sap demand. Against this volatile backdrop, not all restaurants will fare equally.

A group of people eating dinner at a casual-dining restaurant
Source: Getty Images

Best restaurant stocks

Even with the challenges facing the restaurant industry, investing in the best restaurant stocks can still prove to be a wise decision. The industry will likely be in turmoil for a while, but these top three restaurant stocks should deliver solid returns for investors over the long run.

1. McDonald’s

Fast-food giant McDonald’s (NYSE:MCD) was as prepared as any restaurant chain could be for a global pandemic. About 65% of McDonald’s restaurants worldwide, and 95% of restaurants in the U.S., are equipped with a drive-thru. When dining rooms were shuttered in 2020, the drive-thru played a critical role for the company.

McDonald’s has also been investing in digital sales and delivery. The company launched a revamped mobile app in 2017 that allowed customers to order and pay from a smartphone, and its McDelivery service hit its stride in 2019 when partnering with DoorDash (NYSE:DASH) brought delivery to more than 10,000 locations.

But McDonald’s wasn’t immune from the turmoil in the restaurant industry during the early days of the pandemic. With fewer commuters, the company’s breakfast business took a huge hit in the U.S. Sales also plunged in international markets where drive-thrus are less prevalent. Global comparable sales tumbled 7.7% in 2020.

Although the pandemic isn’t officially over, McDonald’s is staging a vigorous recovery. Global comparable sales soared 12% in the first quarter of 2022, with modest growth in the U.S. coupled with strong double-digit growth in international markets. Systemwide sales were up 10% year over year.

The investments McDonald’s made in its digital channels before and during the pandemic are also paying off. Systemwide digital sales in the company’s six largest markets topped $5 billion in the first quarter alone, accounting for almost one-third of total systemwide sales. The recently launched MyMcDonald’s Rewards loyalty program already has 21 million customers enrolled, providing a strong incentive to choose McDonald’s over the competition.

Shares of McDonald’s have soared well past their pre-pandemic high, but the stock remains a good choice for investors looking for a high-quality restaurant for their portfolios. With a price-to-earnings ratio of roughly 25 based on the average analyst estimate for 2022, it’s not too late to invest in this top-notch fast-food chain.

2. Domino’s Pizza

While McDonald’s only recently embraced delivery, Domino’s Pizza (NYSE:DPZ) long ago perfected the art of getting hot food to people quickly. With Domino’s locations largely tuned to carryout and delivery, the pandemic was a positive for the pizza chain.

U.S. same-store sales jumped by more than 11% in 2020, and international markets posted solid growth as well. The company opened more than 600 new locations in 2020, something that many restaurant chains wouldn’t dream of doing during the uncertainty of the pandemic.

With an increasing number of restaurants turning to third-party delivery services to boost sales, Domino’s is facing more delivery competition than ever. The good news is that Domino’s has some key competitive advantages.

The company and its franchisees do all delivery in-house, and Domino’s charges franchisees a very small fee for digital orders. In contrast, a restaurant using a third-party service pays far higher fees, sometimes passing the cost on to consumers in the form of higher prices. For consumers, third-party delivery often comes with multiple layers of fees that can drastically raise the cost of a meal.

Delivery was necessary for restaurants during the pandemic, but it’s unclear whether many will stick with it once dine-in business fully recovers. Domino’s certainly has a cost advantage over any restaurant using a third-party delivery service.

Business has started to slow down a bit for Domino’s. U.S. comparable sales were down 3.6% in the first quarter of 2022 amid staffing shortages and rising inflation. International comparable sales grew about 1%, enough to drive overall revenue slightly higher, but elevated costs led to a significant decline in profits.

Domino’s sells convenience. It was a popular choice before the pandemic, a very popular choice during the pandemic, and it will likely remain a popular choice after the pandemic. Domino’s stock may be a bit volatile as a lofty valuation collides with a slowdown in growth, but the company is well-positioned to continue to be the undisputed leader in the pizza industry.

3. Chipotle Mexican Grill

Fast-casual favorite Chipotle Mexican Grill (NYSE:CMG) pivoted hard toward digital sales at the start of the pandemic. The results have been impressive.

Chipotle managed to boost overall sales about 7% in 2020 despite months of restrictions on in-person dining. Digital sales almost tripled compared to 2019, approaching half of total sales. Of those digital sales, roughly half were delivery and half were pickup. The company first launched delivery through its mobile app in late 2018 by partnering with third-party delivery services. The feature got a workout during the worst of the pandemic.

Chipotle’s sales are still growing strongly in 2022. First-quarter comparable sales rose 9%, and total revenue jumped 16% as store openings boosted revenue. Digital channels are still driving more than 40% of sales, but in-restaurant sales are making a big comeback.

Chipotle has been busy adding Chipotlanes, the company's take on drive-thru, to many of its new locations. Chipotlanes are for digital orders only, with customers placing an order through the app or website and picking it up at the window. This twist on the drive-thru adds another option for customers without introducing throughput-killing bottlenecks. Of the 51 new locations opened in the first quarter, 42 included a Chipotlane.

Chipotle’s bottom line took a hit during the pandemic, but earnings have been bouncing back despite rising costs. Earnings per share surged by 26% in the first quarter, and analysts are expecting full-year earnings to jump by the same percentage to $31.96 per share.

Trading around 43 times projected earnings, Chipotle is not a cheap stock. But earnings can grow swiftly in the coming years as the company drives restaurant-level sales growth through its digital channels and builds hundreds of new restaurants annually. Chipotle is already a giant in the restaurant industry, but there’s still plenty of growth ahead.

Should you buy restaurant stocks?

Restaurant companies that are well-positioned to cope with economic shocks are generally the best restaurant stocks to add to your portfolio. Value-oriented restaurant chains are likely to perform well over the long term. McDonald’s, Domino’s, and Chipotle all fall into that category.

The pandemic will eventually fade into history, but some of the shifts in consumer behavior may last. Working from home will likely continue to be more common, and widely available restaurant delivery is a convenience that is here to stay. If you choose to add restaurant stocks to your portfolio, focus on companies that are more likely to benefit from the prevailing trends.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Domino's Pizza, and DoorDash, Inc. The Motley Fool has a disclosure policy.

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