7 of the Best Restaurant Stocks to Buy in 2019
Bank of America is bullish on these restaurant stocks.
Another year of solid U.S. economic growth has pushed the stock market to all-time highs in 2019, but conditions in the restaurant industry have been challenging. Bank of America analyst Gregory Francfort says store growth trends are driving market share away from weaker restaurants and toward stronger brands, making stock selection critical for investors. Francfort recently updated his projections for 2020 total shareholder returns (earnings growth plus dividends) within the restaurant group. Here are the nine restaurant stocks that are on track for the highest total returns over the next year, according to Bank of America.
Chipotle Mexican Grill (ticker: CMG)
Francfort says Chipotle is one of the best high-growth restaurant options for those with a long-term investing strategy. In the third quarter, Chipotle reported 11% same-store sales growth, including a 7.5% in foot traffic and a 3.5% increase in average check size. Francfort says valuation upside may be limited from recent levels, but Chipotle's near-term growth outlook should support the stock. Bank of America is projecting 2020 total returns of 23.9%, the highest among all restaurant stocks under coverage. The firm has a "neutral" rating and $850 price target for CMG stock.
Domino's Pizza (DPZ)
Domino's reported U.S. same-restaurant sales growth of 2.4% last quarter, but Francfort says international same-restaurant sales growth of just 1.7% was disappointing. He says the strategy of accelerating store openings and sacrificing same-store sales growth to gain market share from competitors is a great way to combat falling margins. Bank of America is projecting Domino's will generate a 14.5% total return in 2020, the highest among all of the "buy"-rated stocks on this list. In addition to the "buy" rating, the firm has a $295 price target for DPZ stock.
McDonald's Corp. (MCD)
McDonald's investors were caught off guard when CEO Steve Easterbrook left the company in November amid allegations of an inappropriate relationship with a co-worker. Easterbrook spearheaded McDonald's technology-driven turnaround since 2015, but Francfort says Easterbrook's vision is in good hands with new CEO Chris Kempczinski. Kempczinski has been head of the company's U.S. business since 2017. Francfort says management needs to reassure shareholders by updating its long-term agenda. Bank of America is projecting a 14.2% total return from McDonald's in 2020. The firm has a "buy" rating and $230 price target for MCD stock.
Darden Restaurants (DRI)
Darden is the parent company of Olive Garden and LongHorn Steakhouse. Francfort says third-quarter same-restaurant sales growth at Olive Garden (2.2%) and LongHorn (2.6%) helped offset sales declines from its smaller brands. Francfort says Darden's ability to maintain margins while increasing sales growth is rare among casual dining peers, which are generally struggling with sales growth. He says Darden's scale advantage should help it continue to exceed earnings expectations. Bank of America is projecting 13.2% 2020 total returns from Darden. The firm has a "buy" rating and $130 price target for DRI stock.
The Cheesecake Factory (CAKE)
The Cheesecake Factory struggled in recent years, and investors have endured a 26% drop in share price since late 2016. Francfort says the company's $353 million buyout deal for Fox Restaurants will create at least a drag of 12 cents per share on fourth-quarter earnings, but management has consistently proven it can generate positive same-store sales growth. CAKE has a 3.3% dividend, the highest of all the stocks on this list. Bank of America is projecting a 12.6% 2020 total return and has a "neutral" rating and $45 price target for CAKE stock.
Wendy's Co. (WEN)
Wendy's reported 4.4% North American same-restaurant sales growth last quarter, thanks in part to the return of its spicy chicken nuggets. Francfort says Wendy's bold strategy to take another swing at breakfast is a risk given its national advertising budget is about 10% the size of Taco Bell's $500 million budget when it launched breakfast in 2014. However, Francfort says Wendy's aggressive 2020 restructuring goals appear to be on track. Bank of America projects 12.4% total shareholder returns in 2020. The firm has a "neutral" rating and $21 price target for WEN stock.
Restaurant Brands International (QSR)
Restaurant Brands is the parent company of Burger King and Tim Hortons. Last quarter, Burger King's international same-restaurant sales growth of 6.5% was especially strong. Burger King launched its Impossible Burger nationwide in August, and Francfort estimates the Impossible Whopper should boost U.S. same-store sales growth by roughly 2% in the near term. Unfortunately, the burger's $1 markup compared to the original Whopper could be a long-term challenge. Bank of America projects 2020 total shareholder returns of 11.7%. The firm has a "neutral" rating and $72 price target for QSR stock.
Yum Brands (YUM)
Yum is a global restaurant company and the parent of Pizza Hut, Taco Bell and KFC. Third-quarter same-restaurant sales growth of 4% at Taco Bell, 3% at KFC and zero growth at Pizza Hut represented deceleration across the board. Francfort says Yum has opportunities in the international market, particularly with its KFC brand. However, its slowing growth and full valuation may limit upside for investors. Bank of America estimates Yum will generate a 10.5% total return in 2020. The firm has a "neutral" rating and $108 price target for YUM stock.
Starbucks Corp. (SBUX)
Francfort says Starbucks generated impressive same-restaurant sales growth of 5% in the U.S. and 6% in China last quarter. Growth in China is up 2% compared to two years ago despite slowing economic growth and increasing competition. In the U.S., growth in the company's rewards program is accelerating, and spending per member is on the rise. Francfort says Starbucks is one of the few true large-cap growth companies within the restaurant group. Bank of America projects 9.9% total shareholder returns in 2020. The firm has a "buy" rating and $97 price target for SBUX stock.
The best restaurant stocks of 2020:
-- Chipotle Mexican Grill (CMG)
-- Domino's Pizza (DPZ)
-- McDonald's Corp. (MCD)
-- Darden Restaurants (DRI)
-- The Cheesecake Factory (CAKE)
-- Wendy's Co. (WEN)
-- Restaurant Brands International (QSR)
-- Yum Brands (YUM)
-- Starbucks Corp. (SBUX)
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