While the restaurant industry was severely impacted by the pandemic, there are clear signs that things are turning around as people feel comfortable venturing back out again. However, some companies were already well-positioned to thrive no matter what was thrown their way.
Whether it’s a brick-and-mortar establishment or a popular food delivery business, a panel of Motley Fool contributors has identified three restaurant stocks with bright prospects that should be on your radar. Read on to learn more.
The fast-casual pioneer
Neil Patel: With a business model that was seemingly built for the disruption of the past 17 months, Chipotle Mexican Grill (NYSE:CMG) is a stock that investors need to follow. The Tex-Mex chain reported another fantastic quarter, with sales rising 38.7% to reach $1.9 billion in the three-month period ending June 30.
Chipotle stands above most other restaurant concepts not least because of its robust digital infrastructure, a strength that will benefit the business for a long time. Customers who were forced to use the company’s website, mobile app, and third-party delivery services during lockdowns are now very familiar with the convenience of this channel, and much of this behavior will stick going forward. Roughly half of all revenue is derived from digital sales, and as of June 30, Chipotle counts an impressive 23 million loyalty members.
There is still plenty of growth left for Chipotle, as management firmly believes the business can more than double its current store footprint of 2,853 to 6,000 one day (just in North America). In the last quarter, the company opened 56 new restaurants, of which 45 were built with a Chipotlane, which is the drive-thru option. These locations boost new restaurant sales, margins, and returns, as customers find them to be an extremely convenient method of ordering.
Same-store sales for the third quarter are forecast to increase in the low- to mid-double-digit range. This is a clear slowdown from the most recent quarter, but it’s nonetheless still a rapid clip, and one that many other retail businesses would envy. Whether pandemic-related behavioral changes by consumers are transitory or permanent remains to be seen, but Chipotle appears to have strengthened its competitive positioning in an industry that was devastated.
Regardless of the outstanding fundamentals and growth prospects, Chipotle’s stock is expensive today. With a price-to-earnings ratio of 91, investors wanting to buy shares are left with no margin of safety. This stock is one to add to your watch list and follow closely for any meaningful pullback.
More than just delivery
Jeremy Bowman: DoorDash (NYSE:DASH) is best known as the leader in restaurant delivery as it now owns more than 50% market share in a highly competitive industry. But what intrigues me most about the stock today is the company’s ambitions outside of delivery with ghost kitchens.
DoorDash just announced a new initiative called DoorDash Kitchens Full Service. The idea takes its DoorDash Kitchens concept, which was launched in 2019, a big step further. DoorDash Kitchens provides space for restaurant delivery concepts. With Full Service, DoorDash is now taking on much of the heavy lifting, including opening and operating a storefront, hiring, meal prep, ordering food, and purchasing equipment. It’s sort of like a restaurant franchise in reverse. DoorDash handles the actual restaurant operations while restaurateurs are responsible for things like the brand and the menu.
The move is a natural extension of DoorDash’s leading position in restaurant delivery. The company already has millions of customers who count on it for dinner every night so it makes sense for the company to get involved in the restaurant side of the business as its direct channel to the customer gives it tremendous power.
Additionally, the company is making strides in extending its deliveries beyond restaurants to supermarkets, pharmacies, convenience stores, and other such businesses, potentially challenging Amazon but with the ability to provide delivery in less than an hour. Those all point to a company penetrating a huge addressable market, and Kitchens Full Service could be a big step in that direction.
Still Golden after all these years
Eric Volkman: I’m going with a stock that I’ve been bullish on for some time now, from a company that has been exemplary through these trying times. That’s right, I’m walking through the golden arches of McDonald’s (NYSE:MCD).
It’s hardly a cutting-edge restaurant stock like many consider fast-casual operators such as Chipotle Mexican Grill to be. That works to its advantage as an investment, though — while others pile into more fashionable companies, good old “Mickey D’s” continues to make an already-strong business even more powerful.
For a company that has been around for many decades now, McDonald’s is actually quite the nimble and adaptable operator. Witness how quick it was to jump on the healthy eating trend years ago, or to establish its McCafe offerings to snatch a tasty chunk of the designer coffee business dominated by Starbucks. Neither move was done half-heartedly or as a reactive, temporary measure; to this day such menu offerings are very popular with customers.
McDonald’s is also a very tech-forward company. Recent years have seen it plow gobs of capital into efficiency-boosting and cost-trimming technology such as the increasingly common ordering kiosks in its restaurants, new automation solutions for its crucial drive-thru channel (a particularly important source of revenue during the coronavirus pandemic), and its well-designed and useful mobile app.
As a result, McDonald’s is holding up better than a great many restaurant chain operators. Full-year 2020 revenue fell by more than 10% (to $19.2 billion), but consider that many of the company’s dining areas were closed throughout much of that time.
Still, it managed to, as usual, deliver a beefy bottom-line profit — $4.7 billion, to be exact, for a 25% net margin. While that didn’t quite hit the 28% of the two preceding years, it topped the 2017 and 2016 rates of 23% and 19%, respectively — not bad for a mature business in one of the economic sectors worst hit by the pandemic, eh?
Finally, thanks to that consistent profitability McDonald’s is an extremely sturdy, reliable, and relatively generous dividend payer. In fact, since it’s lifted its distribution at least once annually for 44 years running it’ll soon be a Dividend King (one of the rare S&P 500 component stocks that has managed the feat for a minimum of 50 years). Just now, the restauranteur’s dividend yield is nearly 2.2%, which is quite high in a sector that isn’t noted for regular shareholder payouts.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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