From fast food to fine dining, restaurants play a vital societal role. But the side dish is that they’re quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry has tumbled by 3.8% over the past six months. This drop was discouraging since the S&P 500 returned 1%.
Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. Taking that into account, here is one resilient restaurant stock pinned to our Google Maps and two we’re swiping left on.
Two Restaurant Stocks to Sell:
Wendy's (WEN)
Market Cap: $1.33 billion
Founded by Dave Thomas in 1969, Wendy’s (NASDAQ: WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Do We Pass on WEN?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Estimated sales growth of 1.3% for the next 12 months implies demand will slow from its six-year trend
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Wendy's is trading at $7.03 per share, or 12x forward P/E. Dive into our free research report to see why there are better opportunities than WEN.
Sweetgreen (SG)
Market Cap: $674.8 million
Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE: SG) is a casual quick service chain known for its healthy salads and bowls.
Why Is SG Risky?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Free cash flow margin shrank by 11.5 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $5.76 per share, Sweetgreen trades at 328.1x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including SG in your portfolio.
One Restaurant Stock to Buy:
Dutch Bros (BROS)
Market Cap: $6.52 billion
Started in 1992 by two brothers as a single pushcart, Dutch Bros (NYSE: BROS) is a dynamic coffee chain that’s captured the hearts of coffee enthusiasts across the United States.
Why Are We Bullish on BROS?
- Fast expansion of new restaurants to reach markets with few or no locations is justified by its same-store sales growth
- Same-store sales growth averaged 6% over the past two years, showing it’s bringing new and repeat diners into its restaurants
- Market share will likely rise over the next 12 months as its expected revenue growth of 24.8% is robust
Dutch Bros’s stock price of $51.29 implies a valuation ratio of 55.8x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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