Restaurant stocks seem easy to invest in because of their relatively simple business model. But they present challenges because of the ever-changing tastes of diners and macroeconomic factors.
While the restaurant industry may be heading for a slowdown, it’s not the case for all chains. There are some restaurants performing quite well that ought to continue doing so, and it may be worth an investor’s time to pull up a seat at the table of the three stocks below.
These arches are still golden
Arcos Dorados (NYSE:ARCO), the Latin American franchisee for McDonald’s (NYSE:MCD), has some of the most difficult challenges a restaurant can face as it services some of the most economically and politically volatile countries. (Hello, Venezuela!)
Even after confronting headwinds such as currency devaluations in Argentina and Brazil, the burger chain was still able to report systemwide same-store sales growth of almost 13% in the third quarter, better than the blended rate of inflation across all of its markets and ahead of what it was able to post in the second quarter.
Like its stateside McDonald’s brethren, Arcos Dorados is in the midst of a restaurant upgrade initiative to make the stores look better and serve customers more efficiently. The reception has been overwhelming; results are strong enough that the franchisee is expanding the remodels beyond the 10 markets it’s currently upgrading.
Arcos Dorados’ results are often heavily weighted against it because it reports earnings in U.S. dollars, which get whacked by currency conversions, but the business is still performing above expectations. While the restaurant doesn’t offer earnings guidance, analysts see the Latin American McDonald’s chain expanding profits at a 16.5% compound annual rate for the next three to five years.
With the stock trading at just 18 times estimated earnings and a small fraction of its revenue, investors may want to get in line for this fast-food leader, and enjoy the modest dividend that yields 1.7% annually.
Growth to go
Carne asada might not be the next fried chicken sandwich, but for Chipotle Mexican Grill (NYSE:CMG), another restaurant with a south of the border flavor, it is a big enough sensation with customers that the limited-time menu item will be around into 2020. The Mexican food chain said the grilled steak dish “continues to exceed the brand’s expectations and drive new customer acquisitions.”
Experimenting with the menu is just one reason the previously left-for-dead restaurant has become a top-performing stock, with shares up almost 90% in 2019. It’s also experimenting with how it gets its food to the customer.
Through a series of tests, Chipotle has found that online order pickup, third-party delivery services, and (surprisingly) drive-thru windows have really clicked with customers. In fact, the success of its Chipotlane drive-thru has been so great, the company is actually slowing down new restaurant openings so it can build more stores with that feature.
Half of the 80 restaurants now under construction will have drive-thrus, which means the total of new restaurant openings will be at the low end of its previously predicted range. And half the 150 or so new restaurants it has planned for 2020 will now also feature Chipotlanes.
Add in the impact that digital ordering is having (almost 20% of all orders are online, and analysts expect that to grow to 34% over the next few years) and this is a restaurant stock that looks to be grade A.
This steakhouse won’t steer you wrong
Speaking of a stock with some sizzle, Texas Roadhouse (NASDAQ:TXRH) is definitely not all hat and no cattle. The steakhouse chain has reported more than three consecutive years of rising quarterly guest traffic, which is no small feat.
You’ll hear many restaurants boast that their comps rose for a quarter, but you’ll find that it’s built on price hikes and product selection, meaning there were fewer customers but they were buying more-expensive items. Texas Roadhouse has been able to offset some of its rising costs, such as labor, by increasing prices, but it hasn’t lost any customers in the process.
Comps were up 4.4% last quarter with earnings of $0.52 per share, handily beat analyst expectations of $0.46. Investors can also sink their teeth into a dividend of $1.20 per share that’s currently yielding 2.1% annually while watching it capture a growth opportunity as big as the Lone Star State.
