The global restaurant industry is experiencing relief from inflation with stabilized margins and heightened consumer enthusiasm for dining experiences. Hence, investors could consider adding top restaurant stocks Papa John's International, Inc. (PZZA), Darden Restaurants, Inc. (DRI), and Chuy's Holdings, Inc. (CHUY) for success this month.
In November, the restaurant industry saw the strongest same-store traffic performance in almost two years, with a year-to-year traffic growth acceleration of 0.7 percentage points. Improved sales growth of 1.9% and moderated average check growth of 3.5% in November 2023 indicate sustained consumer relief and recovery, especially in fast casual and quick-service segments.
In addition, rising consumer spending and the impact of food delivery apps are driving the global fast-food market growth. The market is poised with increased demand for fast-food franchises and online deliveries, fueled by a growing working population and snacking habits. The global fast-food market is anticipated to expand at a CAGR of 5% by 2029.
Besides, the fast-food market's growth is also driven by the popularity of quick-service restaurants. Evolving to modern needs, these establishments prioritize convenience, taste, and affordability, integrating healthier options and leveraging technology like self-order kiosks for an enhanced customer experience.
The global quick-service restaurant market is projected to reach $1.78 trillion by 2030, expanding at a CAGR of 11.2%.
Considering these conducive trends, let’s examine the fundamentals of three Restaurants stock picks, beginning with the third choice.
Stock #3: Papa John's International, Inc. (PZZA)
PZZA operates and franchises pizza restaurants globally. Its segments include domestic company-owned restaurants; North America commissaries; franchising; and international operations, encompassing dine-in and delivery.
On January 3, PZZA launched a Canadian exclusive deal, offering a medium one-topping pizza for $6 with the purchase of any large Specialty Pizza at regular price. The offer started on January 1 for a limited time, offering savings to Canadian customers.
PZZA’s trailing-12-month Return On Total Assets of 9.06% is 126.8% higher than the industry average of 4%. Its 3.87% trailing-12-month CAPEX/Sales is 27.4% higher than the 3.04% industry average.
PZZA declared a fourth-quarter dividend of $0.46 per common share, payable on February 1, 2024. The company pays $1.84 annually, which translates to a yield of 2.5% on the prevailing price level. Its four-year average dividend yield is 1.47%. The company has raised its dividend payouts at a CAGR of 25.1% and 14.4% over the past three and five years, respectively.
In the third quarter, which ended September 24, 2023, PZZA's total revenues increased 2.4% from the prior-year quarter to $522.81 million. The company generated operating income of $31.87 million, up 63.8% year-over-year. Its adjusted net income attributable to common shareholders and EPS stood at $17.23 million and $0.53, respectively.
Street expects PZZA’s revenue and EPS to grow 10.3% and 1.7% year-over-year to $580.30 million and $0.72, respectively, for the fourth quarter ended December 2023.
PZZA’s shares have gained 12.7% over the past three months and 8.7% over the past month to close the last trading session at $73.57.
PZZA’s POWR Ratings reflect its positive prospects. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
PZZA has an A grade for Growth and a B for Quality. Within the Restaurants industry, it is ranked #12 among 44 stocks.
In addition to the POWR Ratings stated above, one can access PZZA’s additional Value, Momentum, Stability, and Sentiment ratings here.
Stock #2: Darden Restaurants, Inc. (DRI)
DRI owns and operates various full-service restaurants in the United States and Canada, including well-known brands like Olive Garden, LongHorn Steakhouse, and Cheddar's Scratch Kitchen.
DRI declared a regular quarterly dividend of $1.31 per common share, payable on February 1, 2024. The company pays $5.14 annually, which translates to a yield of 3.2% on the prevailing price level.
Its four-year average dividend yield is 2.71%. The company has raised its dividend payouts at a CAGR of 62.3% and 12.8% over the past three and five years, respectively. Moreover, the company boasts a two-year record for consecutive years of dividend growth.
DRI’s trailing-12-month EBIT margin of 11.53% is 52.1% higher than the industry average of 7.58%. Its 15.15% trailing-12-month EBITDA margin is 38.9% higher than the 10.91% industry average.
In the second quarter ended November 26, 2023, DRI reported sales and operating income of $2.73 billion and $278.50 million, up 9.7% and 19.4% year-over-year, respectively. The company's net earnings and net earnings per share grew 13.3% and 15.8%, respectively, from the previous-year quarter to $212.10 million and $1.76.
The company updated its fiscal 2024 financial outlook, anticipating total sales of around $11.50 billion and adjusted net earnings per share from continuing operations ranging between $8.75 and $8.90.
DRI’s revenue and EPS are expected to grow 9.1% and 12.1% year-over-year to $3.04 billion and $2.65 for the third quarter ending February 2024, respectively. The company surpassed the EPS estimates in each of the trailing four quarters, which is remarkable.
DRI’s shares increased 14.7% over the past three months to close the last trading session at $160.40.
DRI’s POWR Ratings reflect this sound outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
The stock has a B grade for Stability and Quality. Within the same industry, it is ranked #7.
Click here for DRI’s additional Growth, Value, Momentum, and Sentiment ratings.
Stock #1: Chuy's Holdings, Inc. (CHUY)
CHUY owns and operates full-service restaurants under the Chuy's name in the United States.
CHUY’s trailing-12-month Return on Total Assets of 6.01% is 50.4% higher than the industry average of 4%. Its 8.20% trailing-12-month CAPEX/Sales is 170.2% higher than the 3.04% industry average.
During the third quarter, which ended September 24, 2023, CHUY reported revenue and income from operations of $113.46 million and $7.35 million, up 6.4% and 35.4% year-over-year, respectively. The company's adjusted net income and net income per common share grew 33.1% and 41.9%, respectively, from the prior year's quarter to $7.86 million and $0.44.
For the fiscal year 2023, the company anticipates adjusted net income per share to range between $1.85 and $1.90.
Analysts expect CHUY’s revenue and EPS to grow 12.1% and 41.2% year-over-year to $116.69 million and $0.38, respectively, for the fourth quarter ended December 2023. The company surpassed the revenue and EPS estimates in each of the trailing four quarters.
The stock has gained 26.1% over the past year to close the last trading session at $36.13.
CHUY’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth. Within the same industry, it is ranked #6.
To see CHUY’s additional POWR Ratings for Value, Momentum, Stability, Sentiment, and Quality, click here.
What To Do Next?
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DRI shares were trading at $160.92 per share on Thursday morning, up $0.52 (+0.32%). Year-to-date, DRI has declined -2.06%, versus a -1.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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