Recent market volatility can make anyone’s stomach queasy. Some restaurant stock, however, might be ready to eat.
These three years have been difficult for restaurants. The first Covid-19 prevented people from visiting their favorite restaurants, while the stop-start return to normal life prevented traffic from returning to normal. And just when everything was looking up, runaway food inflation, combined with a shortage of delivery drivers and other staff, hit profit margins. Now restaurants are facing slower growth and possibly a recession, which has caused the
S&P 500 Restaurant Sub-Index
fall by 17% since the start of the year, in line with the
Yet, while the fundamentals look ugly, restaurant stocks have started to show signs of life. After spending most of the year below their 50-day moving average, they have moved solidly above that level, thanks to a 7% gain in the past month. They were led by actions such as
(DPZ), which fell 1.3% after posting disappointing results last Thursday, remains solidly above its 50-day moving average.
Placer.ai, which collects data on restaurant visits, notes that traffic to all types of restaurants has slowed, which makes sense given that economic growth is slowing. Even fast-growing chains like McDonald’s, where visits grew 16.7% last month, and
Chipotle Mexican Grill
(CMG), where they rose 14.6%, saw the pace slow.
This deceleration in restaurant spending was acknowledged by Goldman Sachs analyst Jared Garber, who notes that slowing economic growth is causing people to be more careful about what they spend. A recession, should it occur, would be particularly bad for full-service restaurants. Restaurants have generally maintained their wallet share relative to grocery stores even during recessions, with the exception of the Covid pandemic. But fast food has held up much better.
In an environment of slowing growth,
(YUM) looks particularly attractive. The owner of Kentucky Fried Chicken and Taco Bell offers less expensive foods to consumers who may be looking to cut back, while growing at a relatively rapid pace. It could also be boosted by China, which is trying to restart its economy after several Covid lockdowns.
Yum also looks cheap compared to McDonald’s, Garber says. Historically, Yum has traded at 1.1 times McDonald’s ratio of enterprise value to earnings before interest, taxes, depreciation and amortization — or EV to Ebitda, for short — but these days it’s trades at a slight discount. Returning to its historic premium would put Yum at around $135 per share, Garber writes, up 13% from Friday’s close. Garber upgraded Yum to buy from sell on July 18.
However, Yum will first have to make its profits, which are expected on August 3. The company is expected to post earnings of $1.10 per share, down from $1.16, on sales of $16.5 billion. Leaving Russia was a drag, but the title looks set to have a run. Its shares are just below their 200-day moving average, notes MKM Partners technical analyst JC O’Hara, and a successful break above that level could see the stock aim for $134.
If he can beat earnings, expect Yum to get there sooner rather than later.
Write to Ben Levisohn at [email protected]