Restaurants may be some of the best reopening stocks.
Full-service restaurant stocks are off to a strong start this year after a brutal 2020. Investors anticipate a boom in the restaurant business this summer as cities around the world fully reopen, and diners start to venture back out. Stephens analyst James Rutherford recently took a deep dive into restaurant stocks to look for potential buying opportunities. Rutherford says some full-service restaurant stocks are poised for a comeback, while a handful of top quick-service restaurant stocks are still compelling buying opportunities. Here are seven restaurant stocks to buy that are great reopening plays, according to Stephens.
BJ’s Restaurants (ticker: BJRI)
BJ’s Restaurants is a casual dining chain with more than 200 U.S. locations. Rutherford says reopening in BJ’s critical California market has lagged behind many other states, which should create a tailwind for the company in the second quarter and beyond. Rutherford says the return of bar sales makes BJ’s an excellent reopening stock. BJ’s management has already noted that bar customers are consuming more alcohol following the reopening than they did before the crisis. Rutherford says off-premise sales could also be a growth driver. Stephens has an “overweight” rating and a $70 price target for BJRI stock.
Denny’s Corp. (DENN)
Rutherford says Denny’s was hit particularly hard in 2020 due to the company’s 25% exposure to California, its relatively small off-premise business and its reliance on morning and late-night business, which were disproportionately affected by social distancing. Denny’s revenue dropped 46.6% last year. However, all of those headwinds switch to unique reopening tailwinds in 2021. Rutherford says Denny’s shares already trade near its pre-pandemic earnings multiple, but the company has several near-term bullish catalysts ahead, including unit growth acceleration and a resumption of 24-hour service. Stephens has an “overweight” rating and a $24 price target for DENN stock.
Brinker International (EAT)
Brinker is the parent company of Chili’s and Maggiano’s Little Italy. Rutherford says Brinker’s near-term bullish catalysts include the potential to reopen dining rooms that had higher capacity than peers and the launch of a new virtual brand by the end of the fiscal year. Brinker generated only 63 cents in earnings per share in 2020, but Stephens projects $5.28 in fiscal 2023 EPS. Excluding California and Illinois, Brinker has already been reporting positive same-store sales growth in the low single-digits since January. Stephens has an “overweight” rating and an $80 price target for EAT stock.
Ruth’s Hospitality Group (RUTH)
Ruth’s Hospitality is the parent company of fine dining restaurant Ruth’s Chris Steak House. Rutherford says it may take business occasion sales longer to recover than casual dining sales, which could delay the rebound in Ruth’s business. However, he says there is extreme pent-up demand for business travel, including conventions, sales meetings and other events. Rutherford says high-income customers are in a relatively strong financial position coming out of the health crisis and can help make up for a slower recovery in professional customers. Stephens has an “overweight” rating and a $30 price target for RUTH stock.
Papa John’s International (PZZA)
Pizza giant Papa John’s held up well in 2020. A boom in delivery demand drove 12% revenue growth on the year. However, Rutherford says the stock still has upside given the company’s improved unit economics and reasonable valuation. In addition, Papa John’s management says its Epic Stuffed Crust pizza launch in late December has been extremely successful, and Rutherford says the product should continue to boost total sales. Rutherford says Papa John’s has a much more attractive valuation than top competitor Domino’s Pizza (DPZ). Stephens has an “overweight” rating and a $110 price target for PZZA stock.
Restaurant Brands International (QSR)
Restaurant Brands International is the parent company of fast-food brands Burger King, Popeyes and Tim Hortons. Rutherford says Canadian reopenings and easy year-over-year Burger King comparisons should help Restaurant Brands shares outperform in the near term. However, he says Burger King will need to find a way to stop its ongoing market share losses to McDonald’s (MDC) and Wendy’s (WEN) at some point. Digital marketing, menu innovation and the recently launched Burger King chicken sandwich could all potentially provide sales upside in coming quarters. Stephens has an “overweight” rating and a $70 price target for QSR stock.
Wendy’s Co. (WEN)
Rutherford says he is generally more bullish on full-service restaurant stocks rather than fast food stocks as reopening plays. However, he says Wendy’s is his “best idea” among all restaurant stocks for 2021. Wendy’s shares are up 7% year to date, and Rutherford says the company is flying under the radar, giving investors an excellent buying opportunity. Wendy’s 2020 breakfast menu launch was a big success. However, Rutherford says the stock still trades at a discount to its pre-breakfast valuation, leaving plenty of room for earnings multiple expansion. Stephens has an “overweight” rating and a $26 price target for WEN stock.
Seven restaurant stocks to buy as reopening investments:
— BJ’s Restaurants (BJRI)
— Denny’s Corp. (DENN)
— Brinker International (EAT)
— Ruth’s Hospitality Group (RUTH)
— Papa John’s International (PZZA)
— Restaurant Brands International (QSR)
— Wendy’s Co. (WEN)
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7 Restaurant Stocks to Buy as Reopening Investments originally appeared on usnews.com
Update 05/14/21: This story was published at an earlier date and has been updated with new information.