With worries over rising interest rates and global trade wars, fast food and restaurants stocks with a domestic focus remain a relatively defensive group. From morning doughnuts to game-day wings, and drive-through burgers to fine-dining steakhouses, several leading financial newsletter advisors, and MoneyShow.com contributors, offer some favorite ideas for investors to chew on.
The Wendy's Company (WEN) is a leading quick-service hamburger restaurant with a core focus on North America. It makes money by franchising the Wendy's brand and system to franchisees for a fee. This is an asset-light business -- it owns few Wendy's restaurants -- that has very high margins.
Wendy's released its second-quarter earnings in August; solid revenue growth was driven by new store openings and sales growth at existing restaurants. Revenue grew 5% while earnings grew 8%. As its largest segment, North America drove Wendy's results with 2% same-store sales growth.
Among its long-term growth initiatives, Wendy's digital program will drive future growth. Its digital initiative includes online delivery service, which was available at 40% of North American Wendy's restaurants by the end of the quarter. Delivery service is helping drive incremental sales at these restaurants.
In 2012, Wendy's began to turn around its business. It sold off company-owned stores to franchisees, updated its restaurants' look, and began marketing its fresh, "never-frozen" burgers.
Customers started coming back, and Wendy's started to grow its cash flow. When I first added Wendy's to our portfolio in 2015, it was still in the midst of its turnaround. I saw that Wendy's still had room to improve its business and grow its free cash flow. And since then the stock has since gained 91%. If you're underinvested, buy The Wendy's Company up to $20 per share.
Darden Restaurants (DRI) , based in Orlando, is a leading U.S. restaurant operator. The company operates more than 1,500 restaurants in the United States and Canada under the Olive Garden, Bahama Breeze, Seasons 52, Capital Grille, LongHorn Steakhouse, Eddie V's and Yard House brand names.
Darden is generally regarded as a mid-cap growth company. We believe its initiatives to price aggressively, lower costs and increase customer traffic at Olive Garden are transferable, and may be used to boost results at its specialty brand restaurants.
For all of fiscal 2018, revenue increased 12.7% to $8.08 billion on a comparable-calendar basis. The higher revenue was driven by "everyday-value" pricing and menu simplification. Reflecting $235 million in share repurchases and a 2.3% increase in same-store sales, adjusted EPS rose 19.7% to $4.81. Management had projected fiscal 2018 earnings of $4.75-$4.80 per share.
We note that Darden has topped earnings estimates for the past six quarters. We are raising our fiscal year 2019 EPS estimate to $5.75 from $5.70 and our fiscal year 2020 estimate to $6.35 from $6.30.
Our long-term earnings growth rate forecast is 11%. Given prospects for stronger comp growth at the company's core and specialty restaurant chains, we believe that the shares are undervalued at 20.7 times our revised FY 2019 EPS estimate. Our new target price is $140. At current prices, our target, if achieved, offers investors the prospect of a substantial return.
The company's long history of dividend hikes and share buybacks should also continue to attract growth-income investors. Our long-term rating on Darden remains a Buy, as we believe that share buybacks, unit expansion and further cost reductions will lead to EPS growth over time. We also believe that Darden remains one of the best-managed casual dining companies in our coverage group.
Dunkin' Brands Group (DNKN) operates Dunkin' Donuts and Baskin-Robbins International quick-service restaurants in the U.S. and in more than 60 countries worldwide, serving hot and cold coffee and baked goods, as well as hard-serve ice cream.
At the end of the second quarter 2018, Dunkin' Brands' franchised business model included more than 12,600 Dunkin' Donuts restaurants and more than 8,000 Baskin-Robbins restaurants. There is plenty of room for the company to expand westward from its stronghold in the northeast U.S., and management says that more than 1000 new restaurants will be added before the end of 2020, 90% of which will be outside the northeast U.S.
Since Dunkin' Brands' IPO in 2011, sales have grown consistently at 5.6% a year to reach $860.5 million in fiscal 2017. EPS in that same period have grown more than 30% annually. Analysts who cover the stock have projected EPS growth of 13.4% annually over the next five years. In our model, with share buybacks and margin improvement continuing, we see the potential for 9% revenue growth and 15% EPS growth over the long-term.
Packaged consumer goods, such as ground coffee and coffee pods, are another source of growth and profitability. Already, six out of every ten cups of Dunkin coffee are purchased outside of restaurants. Dunkin's DD Perks rewards program has 8 million members, and their purchases make up 11% of total sales.
Dunkin' Brands also announced that they were changing the name of its flagship business from "Dunkin' Donuts" to simply "Dunkin'." The change will go into effect in early 2019. Stores will retain the familiar pink and orange colors and iconic font.
Despite the name change, the company expects to maintain its emphasis on doughnuts as the #1 seller in the U.S. (with more than 2.9 billion doughnuts and Munchkins sold annually). Dunkin' Brands is also introducing a line of flavored canned iced coffee products, to be distributed by Coca-Cola Co. (KO) ; this follows up on the introduction of bottled iced coffee products two years ago.
Dunkin' Brands has the potential to deliver strong bottom-line results, boosted by share buybacks. On a price/cash flow basis, Dunkin' Brands is reasonably priced and supports a somewhat higher P/E ratio than other businesses. On the downside, we could see a low price of $59. Meanwhile, a projected annual total return of 15.7% is indicated. As a result, we see a potential high price of $141 in five years, based on a high P/E of 28. Dunkin' Brands is a Buy up to $80.
Wingstop (WING) has been one of the more unheralded retail/restaurant winners during the past year, as more big investors (386 owned shares at the end of up June, up from 313 a year ago) think it has the potential to get much bigger over time.
The story can't be any simpler -- the firm serves (you guessed it) wings made three ways with around a dozen seasoning choices, along with the usual fare (fries, drinks) you'd expect from a wing joint.
The valuation here isn't for the faint of heart (81 times trailing earnings), but the stock remains strong because management is thinking big -- the firm ended Q2 with 1,188 locations (1,066 in the U.S.), up 12.5% from a year ago, with excellent economics (make back about half the initial investment in two years, better than nearly all restaurants).
Meanwhile, management has a vision of being one of the top-10 global restaurant brands with many thousands of locations over time (including more than 1,000 potentially just in the dozen international markets it's currently in).
As for results, Wingstop has some of the best same-store sales growth in the entire restaurant sector (actually the best growth when looking at the last five years combined; last quarter was north of 4%) and has numerous initiatives just starting to take root (digital sales, national advertising campaigns, delivery). It's a great cookie-cutter story.
Dave & Buster's (PLAY) has always had a neat retail story, with its combo dining/drinks/gaming locations providing some of the industry's best per-location results ($11.6 million of revenue annually!) and store economics (50% payback of initial costs in year one). Its motto is Eat, Drink, Play, Watch.
The stock had a nice (though choppy) run through last June, then hit potholes as earnings slowed, margins fell and same-store sales dipped sharply. There are still some lingering worries, but the stock has turned strong for a couple of reasons.
First, the latest results were terrific -- revenue growth of 14% was the fastest in a year, earnings crushed expectations, store growth was reaffirmed (13%-plus this year) and management hiked earnings estimates (which rose about a dime per share both this year and next after the report).
Second, the top brass became more generous with shareholders, initiating a decent dividend (about a 1% annual yield) and buying back shares when they were down (the share count dipped 6% year-on-year in Q2). Just as important, the steadying of business trends is allowing investors to focus on the long-term potential of 240 locations in North America, vs. 117 today. This solid longer-term story looks to be back on track. Technically, the path of least resistance is up, but try to buy on dips.