Home 2021 Assuming This Recovery Continues…

Assuming This Recovery Continues…

by Paul Ebeling

#recovery #economy #restaurants


Outside of controlling the spread of the VirusCasedemic, fiscal and monetary stimulus are the biggest drivers of this of recovery” — Paul Ebeling

Restaurant stocks have made a strong comeback in the past yr, as the broader economy and the restaurant industry continue to recover from the VirusCasedemic.

The Invesco Dynamic Leisure and Entertainment ETF (PEJ) has returned over 60% in the past yr, and over 20% YTD

We are expecting the restaurant recovery to continue, and there are high-quality stocks that can provide good returns. The following 3 restaurant stocks have competitive advantages, future growth potential and pay above-market dividend yields.

Restaurant Stock #1: Darden Restaurants (DRI)

Darden is a restaurant conglomerate with a variety of brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V’s. It has over 1,700 restaurants in all.

The company recently concluded its full fiscal year, with strong results across the board. Revenue increased 80% to $2.3-B, due to higher comparable sales as well as new restaurant openings.

Darden has been one of the biggest beneficiaries of the reopening of restaurants across the country, as it operates casual sit-down restaurants that were closed during the pandemic. The company has returned to profitability as a result, with adjusted EPS of 4.77 for the fiscal year, compared with a loss of $0.43/share in FY 2020.

As a reflection of the company’s improving fundamentals, Darden has meaningfully increased its cash returns. The company recently raised its dividend by 25% to $1.10/share, resulting in a solid 3% yield at the current share price.

Restaurant Stock #2: Yum! Brands (YUM)

YUM is a fast-food giant, with its 3 core brands Taco Bell, Pizza Hut, and KFC. In all, the company has over 50,000 restaurants around the world. YUM’s fast-food business model makes it a recession-proof stock.

Last yr, the company performed much better than the industry, with a relatively mild 3% decline in total sales. It has also enjoyed the strong recovery over the course of Y 2021, with constant-currency sales growth of 26% in the most recent Quarter.

YUM saw broad-based growth with KFC at 35%, Taco Bell at 24% and Pizza Hut at 10%. Adjusted EPS increased 41% for the period.

YUM increased its restaurant unit count by 2% last Quarter, and due to the company’s strong results to begin Y 2021, it has reinstated its long-term growth objective of 4%-5% annual unit growth.

With global scale and a recession-resistant business model, YUM generates enough cash flow to invest in growth, and return cash to shareholders. In May the company announced a new $2-B share repurchase, while the stock has a 1.5% yield.

Restaurant Stock #3: Jack in the Box (JACK)

Jack in the Box is a fast-food restaurant with more than 2,200 restaurants in 21 states and Guam. Like YUM, its fast-food business model insulates the company from recessions, such as the coronavirus pandemic last year. Even in a very challenging year for the restaurant industry in Y 2020, Jack in the Box posted resilient sales and profits, and the company has continued to grow in Y 2021.

EPS in Q-3 rose 26% Y-Y, as total revenue increased 11% due to 10% growth in same-store sales (this measures growth at restaurants open at least 1 yr). Adjusted EBITDA was $79-M for Q-3 Y 2021, while Jack in the Box generated a restaurant-level margin of 26% implying strong profitability.

Jack in the Box is another shareholder-friendly company that returns a high level of cash to shareholders. The company utilized $65-Mfor share buybacks in Q-3 Y 2021, and has $70-M remaining on its share repurchase authorization. The stock also pays a dividend which currently yields 1.7%.

The restaurant industry continues its steady recovery, as more restaurants reopen across the country.

Assuming the economic recovery continues, investors can still buy high-quality restaurant stocks at reasonable valuations.

Darden, Yum! Brands, and Jack in the Box are all growing their sales and profits, and rewarding shareholders with rising share prices and dividends.

Have a prosperous day, Keep the Faith!

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