It’s easy to get the appeal of restaurant stocks in a normalizing economy. So believes Jim Cramer, the well-known host of CNBC’s Mad Money.
Commenting following Fed Chair Jerome Powell’s speech last week, which indicated a willingness by the policy makers to take a less aggressive rate-hiking stance going forward, Cramer has selected several restaurant stocks as looking ripe for the picking.
“Maybe the economy’s normalizing here, or at least the Fed chief thinks it could be soon to normalize,” Cramer said. “And in a normal environment, stock picking is much more about identifying the best players in any given industry, rather than just jumping from sector to sector.”
Specifically, Cramer has tagged two fast food service companies, describing their business ops as ‘totally consumer-facing’ and easy for investors to understand. We’ve opened up TipRanks database to pull up the latest stats on his picks; here they are, along with comments from Cramer and from the Wall Steet analysts.
Chipotle Mexican Grill (CMG)
The first ‘Cramer pick’ we're looking at is Chipotle Mexican Grill, a company with the twin benefits of a highly recognizable brand image and a secure place in the fast food lane. Cramer notes these advantages, and adds that the company also benefits from a reliable mobile ordering tech and the pricing power afforded by solid customer brand loyalty.
But it’s the possibility that inflation may truly moderate that has Cramer most excited about Chipotle as an investment. In his words, “What really gets me excited about Chipotle is simple: As their costs come down — and that’s happening now that the Fed’s winning its war on inflation — their earnings can soar higher.” This is the logic behind Cramer's choice of Chipotle as a growth stock pick.
In the company’s last reported quarter, 3Q22, top-line revenues came in at $2.22 billion, up some 13% year-over-year. The company’s digital sales made up 37% of the total, while in-restaurant sales rose on economic normalization, growing more than 22% y/y. Comp store sales were up 7.6%. Adjusted diluted EPS was reported at $9.51, up an impressive 35% from the year-ago result of $7.02.
It wasn’t just the financial numbers that were growing for Chipotle during Q3 – the company was also expanding physically. Chipotle opened 43 new locations during the quarter, including 38 featuring Chipotlane drive through service.
Piper Sandler’s 5-star analyst Nicole Miller Regan has also been following Chipotle – and she likes what she sees.
“We continue to view the company-owned model, alongside a pristine balance sheet, as drivers for strategic execution despite the macro backdrop…. We continue to view the key catalyst for CMG shares to be new unit growth, with a nod to international success thus far, and continue to see CMG shares as the dominant large-cap restaurant growth stock,” Regan opined.
Overall, Regan believes this is a stock worth holding on to. The analyst rates CMG shares an Overweight (i.e. Buy), and her $2,500 price target suggests a solid upside potential of ~56%. (To watch Regan’s track record, click here)
This strongly-placed Mexican-themed fast-casual food chain has picked up 19 reviews from the Wall Street analysts – including 17 Buys against just 2 Holds, for a Strong Buy consensus rating. (See CMG stock forecast on TipRanks)
McDonald’s Corporation (MCD)
McDonald’s needs no introduction; the company’s Golden Arches are one of the world’s most iconic brand symbols, and McDonald’s has built and held its leading position in the fast food burger franchise industry for over 60 years. The company’s combination of longevity, brand position, reliable dividend, and ability to maintain performance even in difficult economic times have lead Cramer to make MCD his 'defensive stock pick.'
Cramer points out that this is a company able to bring in sound returns no matter how the economic winds blow; as he put it, “between the technology improvements, the global store growth and the excellent marketing, they thrive in good times.”
Just how does McDonald’s thrive? A look at recent income data shows that the company has seen revenues consistently above $5 billion per quarter over the last several years. The most recent quarter, 3Q22, came in with a top line of $5.8 billion, this was down 5% y/y, but still well within the company’s recent quarterly revenue range. EPS, at $2.68, was down 6% from the year-ago quarter’s $2.86 – but the 3Q22 EPS result was the second-highest in the last two years. Globally, the company’s comp store sales were up 9.5% in the third quarter; this number was up 6% in the US market.
In Q3, the company announced a 10% increase in the cash dividend, to $1.52 per share. The new payment is set to go to common shareholders on December 15. At this rate, the dividend annualizes to $6.08, and gives a yield of 2.2%. This yield in-line with the average in peer companies; the real key to MCD’s dividend is its reliability, as the company has kept up consistent payments for the last 14 years.
Covering this stock for Jefferies is 5-star analyst Andy Barish, who agrees that McDonald’s is set to keep on delivering even against a difficult backdrop. He writes, “We think MCD is prepared to succeed even in challenging US/EU environments near-term with a powerful brand and scale... We think MCD remains both an attractive defensive/offensive play given 85-90% of margin dollars are from franchise biz and multiple US/EU SSS drivers. With dividend and share repurchase program, we believe MCD's TSR profile is also attractive at current levels”
In line with these views, Barish rates MCD stock a Buy, and his price target of $305 implies a 12-month gain of 11.5%. (To watch Barish’s track record, click here)
Overall, it’s clear that Wall Street agrees with the bullish take here, as the 22 recent analyst reviews break down 18 to 4 in favor of Buy over Hold and give the stock a Strong Buy consensus rating. (See MCD stock forecast at TipRanks.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.