The restaurant industry is benefitting from easing inflation and the heightened consumer zest for dining experiences. Moreover, the industry is anticipated to remain resilient due to technological advancements and the increasing preferences for fast-casual eateries fueled by easy mobile ordering and takeaway options.
Given this backdrop, fundamentally robust restaurant stocks Compass Group PLC (CMPGY), Arcos Dorados Holdings Inc. (ARCO), and Domino's Pizza Group plc (DPUKY) could be solid buys now.
In 2023, the restaurant industry successfully navigated inflation and maintained stability. According to the National Restaurant Association (NRA), restaurant sales witnessed uninterrupted growth for the tenth consecutive month, reaching $94.6 billion in December. The past ten months saw an 8.3% increase in eating and drinking place sales, surpassing the non-restaurant retail sectors' 2.4% gain, reflecting consumers' continued preference for dining out and experience-centric spending.
The restaurant and food service industry is expected to continue its growth trajectory in 2024, with sales estimated to surpass $1 trillion.
The prevailing consumer behavior reflects a distinct inclination toward value-centric purchases, with prime emphasis on experience and premium quality. According to The Food Institute insights, consumers are increasingly price-sensitive, exploring multiple channels to find value.
Moreover, with an evident shift toward fast-casual dining, fostered by the convenience of mobile orders and takeout services, this transformation extends beyond a mere pandemic-era phenomenon toward a consistent change in customer behavior.
Furthermore, technology is predicted to overhaul front-of-house operations throughout the restaurant industry. A higher number of operators plan to invest in tech in 2024 compared to last year, especially in products that enhance the customer experience (60%) and optimize kitchen efficiency (52%). The year is set to observe escalated adoption of digital menus and ordering systems, often integrated with customer-facing tablets or mobile applications.
The technological pivot holds substantial potential to be a game-changer for the restaurant industry, introducing swiftly growing efficiencies. Restaurants demonstrating adaptability to evolving consumer behaviors and rapidly advancing technology are expected to register noticeable growth throughout the year.
The U.S. foodservice market size is estimated to reach $1.37 trillion, growing at a CAGR of 10.7% by 2029.
Given the industry tailwinds, it's time to examine the fundamentals of the three stocks to buy in the Restaurants industry, starting with the third in line.
Stock #3: Compass Group PLC (CMPGY)
Headquartered in Chertsey, the United Kingdom, CMPGY operates as a food and support services company in North America, Europe, and internationally. The company offers support services; reception services at corporate headquarters; managing remote camps; grounds and facilities services at schools and universities; and others.
On February 7, CMPGY completed c.$100 million of its share buyback program, delivering long-term, compounding shareholder returns.
On January 22, CMPGY acquired CH&CO, a provider of premium contract and hospitality services in the U.K. and Ireland, for an initial enterprise value of $600 million with an additional earn-out over the two years following closing, dependent on the profit growth of the business.
The acquisition is in line with the company’s longstanding strategy to create value through disciplined capital allocation. CMPGY's strong cash generation and balance sheet give CMPGY the flexibility to invest in organic growth and acquire high-quality businesses with exceptional management teams, enabling us to accelerate growth further and enhance shareholder returns.
Its annualized dividend of $0.71 per share translates to a dividend yield of 2.53% on the current share price. Its four-year average yield is 1.34%. CMPGY’s dividend payments have grown at a 2.2% CAGR over the past five years.
CMPGY’s trailing-12-month cash from operations of $2.53 billion is 849.8% higher than the industry average of $266.65 million. Its trailing-12-month ROCE, ROTC, and ROTA of 23.87%, 12.21%, and 7.47% are 108.5%, 98.2%, and 81.9% higher than the industry averages of 11.45%, 6.16%, and 4.10%, respectively.
For the fiscal year that ended September 30, 2023, CMPGY’s underlying revenue and underlying operating profit increased 16% and 27.5% year-over-year to $38.22 billion and $2.59 billion, respectively. Moreover, its underlying EBITDA stood at $3.62 billion, up 25% from the year-ago value.
For the same year, underlying profit attributable to equity shareholders and underlying earnings per share increased 33.9% and 36.7% from the previous year to $1.83 billion and 105.20 cents, respectively.
Street expects CMPGY’s revenue and EPS for the fiscal year ending September 2024 to increase 8.3% and 11.8% year-over-year to $42.35 billion and $1.19, respectively.
The stock has gained 25.6% over the past year to close the last trading session at $28.21. Over the past three months, it has gained 11.4%.
CMPGY’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an A grade for Stability. Within the 42-stock Restaurants industry, it is ranked #4.
To see additional POWR Ratings for Growth, Value, Momentum, Sentiment, and Quality for CMPGY, click here.
Stock #2: Arcos Dorados Holdings Inc. (ARCO)
Headquartered in Montevideo, Uruguay, ARCO operates as a franchisee of McDonald's restaurants. It has the exclusive right to own, operate, and grant franchises of McDonald's restaurants in 20 countries and territories.
It pays an annual dividend of $0.16 per share, which translates to a dividend yield of 1.33% on the current share price. Its four-year average yield is 1.25%. ARCO’s dividend payments have grown at CAGRs of 34.7% and 31.3% over the past three and five years, respectively.
ARCO’s trailing-12-month CAPEX/Sales of 7.69% is 151.5% higher than the industry average of 3.06%. Its trailing-12-month ROCE, ROTC, and ROTA of 52.68%, 10.09%, and 6.32% are 360.2%, 63.8%, and 54.1% higher than the industry averages of 11.45%, 6.16%, and 4.10%, respectively.
For the fiscal third quarter that ended September 30, 2023, ARCO’s total revenues and operating income increased 22.1% and 23.2% year-over-year to $1.13 billion and $91.08 million, respectively. Moreover, its adjusted EBITDA stood at $129.12 million, up 25.8% from the year-ago quarter.
For the same quarter, net income attributable to ARCO and basic net income per common share increased 27.4% and 27.3% from the prior-year quarter to $59.72 million and $0.28, respectively.
Street expects ARCO’s revenue and EPS for the fiscal year ending December 2024 to increase 6.1% and 14% year-over-year to $4.56 billion and $0.88, respectively. The company surpassed consensus revenue estimates in each of the trailing four quarters and consensus EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 48.2% over the past year to close the last trading session at $12.03. Over the past nine months, it has gained 43.9%.
ARCO’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.
ARCO has an A grade for Sentiment and a B for Value. It is ranked #3 within the same industry.
Click here for the additional POWR Ratings for ARCO (Growth, Momentum, Stability, and Quality).
Stock #1: Domino's Pizza Group plc (DPUKY)
Headquartered in Milton Keynes, the United Kingdom, DPUKY owns, operates, and franchises Domino's Pizza stores. It operates stores in the United Kingdom and the Republic of Ireland, as well as leases its stores.
Its annualized dividend of $0.25 per share translates to a dividend yield of 2.88% on the current share price. Its four-year average yield is 2.84%. DPUKY’s dividend payments have grown at CAGRs of 1.1% and 3.5% over the past three and five years, respectively.
DPUKY’s trailing-12-month asset turnover ratio of 1.32x is 35.3% higher than the industry average of 0.98x. Its trailing-12-month ROTC and ROTA of 17.84% and 25.03% are 189.5% and 509.9% higher than the industry averages of 6.16% and 4.10%, respectively.
For the fiscal third quarter ending September 24, 2023, its total system sales came at £363.70 million ($459.31 million), up 5.5% year-over-year. As of November 9, 2023, it had 1,304 stores in the U.K. and Ireland.
For the six months that ended June 25, 2023, DPUKY’s underlying revenue and underlying gross profit increased 19.6% and 20.9% from the prior-year period to £332.90 million ($420.42 million) and £153.20 million ($193.48 million), respectively.
For the same period, underlying profit for the period and underlying earnings per share stood at £39.60 million ($50.01 million) and 9.50 pence, respectively. Moreover, its underlying EBITDA stood at £68.70 million ($86.76 million), up 8.2% from the year-ago period.
Street expects DPUKY’s revenue for the fiscal year ending December 2024 to increase 4.9% year-over-year to $878.60 million.
The stock has gained 14.7% over the past nine months to close the last trading session at $8.74. Over the past year, it has gained 9%.
DPUKY’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
DPUKY has an A grade for Stability. Within the same industry, it is ranked #2.
Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Momentum, Sentiment, and Quality. Get all ratings of DPUKY here.
What To Do Next?
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CMPGY shares were unchanged in premarket trading Monday. Year-to-date, CMPGY has gained 2.66%, versus a 5.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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