Citi took a broad look at the restaurant sector on Tuesday and initiated coverage on a large number of stocks.
Analyst Jon Tower said a once euphoric reopening feeding frenzy on restaurant stocks is now a purge amid the concerns over supply chain disruptions, labor shortages and the impact of excessive inflation. Still, opportunities are seen for investors with restaurant category leaders trading at attractive valuations.
The overall industry view from Citi on the restaurant sector is that consumers will push through near to medium-term inflationary pressures, with the backdrop of strong wage and jobs growth fueling spending power, grocery inflation providing some air cover and discretionary wallet share shifting back to services/restaurants from durables. However, there is caution sounded on Street estimates for the second half of 2022 and into 2023, especially if commodity markets don’t reverse.
Tower and team see the most upside opportunity in stocks where improving data/estimates can flip the market narrative to positive and shares are trading at an attractive absolute and relative valuation. That group of Buy-rated stocks included Domino’s Pizza (NYSE:DPZ +1.1%), Texas Roadhouse (NASDAQ:TXRH +3.7%), Yum Brands (NYSE:YUM +1.4%), Wingstop (NASDAQ:WING +1.9%) and Cheesecake Factory (CAKE +4.2%). Category leaders Chipotle (CMG +3.4%) and Darden Restaurants (DRI +3.8%) also earn Buy ratings, as does emerging growth name First Watch Restaurant Group (FWRG +2.7%).
Citi is notably cautious on McDonald’s (MCD +0.0%) and Starbucks (SBUX -0.2%).
Looking further down the road, emerging five-year themes for the industry include automation, subscriptions/recurring revenue streams and vertical integration of the supply chain, tech stack, etc.
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