Restaurants are go-to meeting hubs for friends, family, and colleagues. But it’s not all sunshine and rainbows as they’re notoriously hard to run thanks to perishable ingredients, labor shortages, or volatile consumer spending. These factors have weighed on the industry over the past six months as its 7.2% return has fallen short of the S&P 500’s 12% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here are two restaurant stocks we think can generate sustainable market-beating returns and one we would avoid.
One Restaurant Stock to Sell:
Cracker Barrel (CBRL)
Market Cap: $1.22 billion
Known for its country-themed food and merchandise, Cracker Barrel (NASDAQ:CBRL) is a beloved American restaurant and retail chain that celebrates the warmth and charm of Southern hospitality.
Why Are We Bearish on CBRL?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Earnings per share have dipped by 32.8% annually over the past seven years, which is concerning because stock prices follow EPS over the long term
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Cracker Barrel’s stock price of $54.77 implies a valuation ratio of 70.2x forward P/E. To fully understand why you should be careful with CBRL, check out our full research report (it’s free).
Two Restaurant Stocks to Watch:
Restaurant Brands (QSR)
Market Cap: $27.51 billion
Formed through a strategic merger, Restaurant Brands International (NYSE:QSR) is a multinational corporation that owns three iconic fast-food chains: Burger King, Tim Hortons, and Popeyes.
Why Are We Fans of QSR?
- New restaurant openings and solid same-store sales performance have boosted its top-line growth
- Excellent operating margin of 25.2% highlights the efficiency of its business model, and its rise over the last year was fueled by some leverage on its fixed costs
- QSR is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its improved cash conversion implies it’s becoming a less capital-intensive business
At $79.38 per share, Restaurant Brands trades at 18.4x forward P/E. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.
Texas Roadhouse (TXRH)
Market Cap: $12.53 billion
With locations often featuring Western-inspired decor, Texas Roadhouse (NASDAQ:TXRH) is an American restaurant chain specializing in Southern-style cuisine and steaks.
Why Does TXRH Stand Out?
- Aggressive strategy of rolling out new restaurants to gobble up whitespace is prudent given its same-store sales growth
- Customers are lining up to eat at its restaurants as the company’s same-store sales growth averaged 6.1% over the past two years
- ROIC punches in at 21.2%, illustrating management’s expertise in identifying profitable investments
Texas Roadhouse is trading at $190.90 per share, or 26.6x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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