While inflation is still eating away at consumers’ purchasing power, the restaurant industry is showing an upsurge in sales. In light of this, I have highlighted three fundamentally robust restaurant stocks, Domino's Pizza Group plc (DPUKY), Nathan's Famous, Inc. (NATH), Rave Restaurant Group, Inc. (RAVE), and Biglari Holdings Inc. (BH), which seem well-positioned to garner significant returns in the long term.
Preliminary data from the U.S. Census Bureau shows that eating and drinking places had a healthy gain in July, with total sales reaching $91.10 billion. This marks the third consecutive month of solid growth, following robust gains in May (1.6%) and June (0.8%).
According to the National Restaurant Association’s 2023 State of the Restaurant Industry report, the food service industry is expected to reach $997 billion in sales in 2023, with one contributing factor being the inflation-led upward trend in menu prices.
Moreover, underscoring the different growth avenues for the restaurant industry, the demand for online food delivery services has experienced a significant boost post-pandemic, allowing consumers to order from various restaurants and cuisines.
The global online food delivery services market is expected to grow from $128.32 billion in 2022 to $143.05 billion in 2023 at a CAGR of 11.5%. Further, the market is expected to reach $159.46 billion in 2027, growing at a CAGR of 2.8%.
In a year, the global food and beverages market witnessed substantial expansion, surging from $6.73 trillion in 2022 to $7.22 trillion in 2023, expanding by a robust CAGR of 7.3%. Moreover, the food and beverages market is projected to reach $9.23 trillion by 2027, growing at a CAGR of 6.3%.
To that end, let us evaluate the aforementioned profitable Restaurants stocks in detail, starting with the fourth one.
Stock #4: Domino's Pizza Group plc (DPUKY)
Based in Milton Keynes, the United Kingdom, DPUKY owns, operates, and franchises several Domino’s Pizza outlets. It operates stores in the United Kingdom and the Republic of Ireland and leases its stores.
During the fiscal first half that ended June 25, DPUKY’s group revenue increased 19.6% year-over-year to £332.90 million ($415.74 million). Its gross profit rose 20.9% year-over-year to £153.20 million ($191.32 million).
Its profit for the period improved by 90.5% from the year-ago value to £80.20 million ($100.16 million). Also, the company’s EPS stood at 19.2pence, up 102.1% year-over-year.
Street expects DPUKY’s revenue to increase 15% year-over-year to $822.77 million in the current year (ending December 2023). For the fiscal year 2024, its revenue is anticipated to reach $863.61 million, registering a 5% growth from the prior year.
DPUKY’s revenue and EBITDA have increased at CAGRs of 9% and 5.6% over the past three years, respectively, while its EPS has improved at an impressive CAGR of 146% over the same period.
The stock’s trailing-12-month net income margin of 18.28% is 321.7% higher than the industry average of 4.33%. Likewise, its EBIT and levered FCF margins of 16.34% and 11.13% are 124.6% and 118.5% higher than the industry averages of 7.28% and 5.09%, respectively.
Over the past year, the stock has gained 64.6% to close the last trading session at $9.86. It has gained 40.7% year-to-date.
It’s no surprise that DPUKY has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Momentum, Stability, and Quality. Within the B-rated Restaurants industry, it is ranked #5 out of 54 stocks.
In addition to the POWR Ratings we’ve stated above, we also have DPUKY’s ratings for Growth, Value, and Sentiment. Get all DPUKY ratings here.
Stock #3: Nathan's Famous, Inc. (NATH)
NATH operates and franchises restaurants under its brand, sells NATH's Famous branded products through various retail channels, and has license agreements for the production and distribution of hot dogs, sausages, and other food products.
For the fiscal first quarter that ended June 25, NATH’s total revenues increased 5.7% year-over-year to $41.99 million, while income from operations stood at $11.46 million.
The company’s net income and income per share came in at $7.39 million and $1.81, representing increments of 3.5% and 4% from the prior-year period, respectively. Additionally, NATH’s adjusted EBITDA stood at $12.04 million.
Over the past three years, NATH’s EBITDA and revenue have grown at 9.3% and 13.7% CAGRs, respectively. Moreover, its EPS has increased at a 19.2% CAGR over the same period.
The stock’s trailing-12-month EBIT and levered FCF margins of 25.65% and 14.94% are 252.6% and 193.2% higher than the industry averages of 7.28% and 5.09%, respectively. Likewise, its trailing-12-month net income margin of 14.94% compares to the 4.33% industry average.
Over the past year, the stock has gained 9.9% to close the last trading session at $71.23. It is up 6% year-to-date.
NATH has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Quality and a B for Momentum. Within the same industry, it is ranked #4.
In addition to the POWR Ratings we’ve stated above, we also have NATH’s ratings for Growth, Value, Stability, and Sentiment. Get all NATH ratings here.
Stock #2: Rave Restaurant Group, Inc. (RAVE)
RAVE operates and franchises Pizza Inn buffet and Delco restaurants in the United States and internationally, along with Pie Five fast-casual pizza restaurants. The company offers dine-in, carryout, delivery, and non-traditional location services.
RAVE’s revenues for the fiscal third quarter (ended March 26) increased 13.4% year-over-year to $2.97 million, while its net income stood at $323 thousand. The company’s income per share of common stock stood at $0.02.
Additionally, for the nine months ended March 26, the company’s cash provided by operating activities increased 134.9% year-over-year to $1.23 million.
Over the past three years, RAVE’s EBITDA and levered FCF have grown at 6.6% and 24.4% CAGRs, respectively. Moreover, its total Assets have increased at a 14.6% CAGR over the same period.
The stock’s trailing-12-month EBIT and levered FCF margins of 15.03% and 11.85% are 106.6% and 132.6% higher than the industry averages of 7.28% and 5.09%, respectively. Likewise, its trailing-12-month net income margin of 66.57% compares to the 4.33% industry average.
The stock has gained 48.8% over the past year and 24.1% over the past six months to close the last trading session at $1.80.
RAVE’s POWR Ratings reflect solid prospects. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
RAVE also has an A grade for Quality and a B for Value, Momentum, and Sentiment. It is ranked #3 in the same industry. Click here to see the other ratings of RAVE for Growth and Stability.
Stock #1: Biglari Holdings Inc. (BH)
BH owns, operates, and franchises restaurants in the United States under the names of Steak n Shake and Western Sizzlin. The company also engages in underwriting commercial trucking insurance, selling physical damage and non-trucking liability insurance to truckers, and providing property and casualty insurance.
For the fiscal second quarter of 2023, BH’s total revenues increased 1.3% year-over-year to $93.54 million. Its earnings before income taxes amounted to $2.89 million compared to a year-ago loss of $96.49 million.
The company’s net earnings of $1.88 million and net earnings per average equivalent Class A share of $6.64 registered significant improvements from the prior-year quarter’s losses of $73.78 million and $244.37, respectively.
Over the past three years, BH’s EBITDA and tangible book value have grown at 2.5% and 6.5% CAGRs, respectively. Moreover, its levered FCF and normalized net income have increased at 9.7% and 13.3% CAGRs over the same period.
The stock’s trailing-12-month EBITDA and net income margins of 23.78% and 29.10% are 117.8% and 571.4% higher than the industry averages of 10.92% and 4.33%, respectively. Likewise, its trailing-12-month levered FCF margin of 7.65% compares to the 5.09% industry average.
BH’s shares have gained 41.7% over the past year and 29.1% year-to-date to close the last trading session at $179.25.
BH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Momentum, Stability, and Quality. In the same industry, it is ranked #2. Click here to view BH’s ratings for Growth and Sentiment.
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DPUKY shares were trading at $9.86 per share on Wednesday afternoon, down $0.24 (-2.38%). Year-to-date, DPUKY has gained 34.70%, versus a 17.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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