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Forget Chipotle, Buy These 3 Restaurant Stocks Instead

Following the arrival of coronavirus vaccines, the restaurant industry has stabilized and consumers are gradually returning to dine-in restaurants. However, despite being a major fast food restaurant chain, Chipotle Mexican Grill (CMG) doesn’t look well positioned to benefit from the industry’s rebound, as evident from its weak results in the last reported quarter. However, investing in stocks like Yum! Brands (YUM), Papa John's (PZZA), and Jack in the Box (JACK) should help you profit from the restaurant industry’s comeback.

Chipotle Mexican Grill, Inc. (CMG) is a long-time leader and innovator in the food industry, committed to making its food more accessible to everyone. However, in its latest quarter costs related to the coronavirus pandemic have dented earnings even as online orders boosted sales. The company said that it has paid more in medical claims and performance-related bonuses to employees keeping its restaurants open during the health crisis. CMG’s Q4 (ended December 31) non-GAAP EPS of $3.48 fell short of consensus estimates by 6.7%. Consequently, its stock declined 4.72% over the past month.

This comes at a time when the restaurant industry is recovering from the pandemic-driven business disruption. The mass vaccination drive has made investors optimistic about the industry’s recovery in 2021, as demand for indoor dining is expected to rise following almost a year-long hiatus. Additionally, the permanent closure of many independent restaurants had left significant market share to larger restaurant chains who have the resources to weather temporary closures. Given the scenario, it could be prudent to invest in fast food companies like Yum! Brands, Inc. (YUM), Papa John's International, Inc. (PZZA) and Jack in the Box Inc. (JACK), as these stocks are currently better investment opportunities than CMG.

Yum! Brands, Inc. (YUM)

Based in Kentucky, YUM operates and franchises over 50,000 quick service restaurants worldwide. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The Company’s family of brands also includes a fast-casual restaurant concept, The Habit Burger Grill.

On January 7, 2021, KFC had introduced a new, premium chicken sandwich across all 4,000 KFC U.S. restaurants. The new KFC Chicken Sandwich was tested last spring, following which the company nearly doubled its sales expectations. On January 26th, Pizza Hut introduced a newly handcrafted, unique Detroit-Style pizza nationwide.

Later in January, YUM was named to the 2021 Bloomberg Gender-Equality Index (GEI) for its commitment to advancing women’s equality and transparency in gender reporting.

YUM’s revenues have increased 2.9% year-over-year to $1.74 billion in the fourth quarter ended December 31, 2020. Its company sales grew 15.5% from the year-ago value to $566 million, while EPS excluding special items improved 15% over the same period to $1.15.

Analysts expect YUM’s revenues to rise 14.8% year-over-year to $1.45 billion in the current quarter ending March 31, 2021. The consensus EPS estimate of $0.86 for the current indicates a 34.4 improvement from the year-ago value. The company has an impressive earnings surprise history, as it beat the Street EPS estimates in three out of trailing four quarters. The stock has gained 9.4% over the past six months.

YUM’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B which equates to Buy in our rating system. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree.

YUM has a Quality Grade of A and a Growth Grade of B. It is currently ranked #5 of 47 stocks in the Restaurants Industry.

In total, the POWR Ratings evaluate YUM on eight different levels. Beyond what we stated above, the POWR Ratings have also graded YUM for Value, Momentum, Stability, and Sentiment. Get all of YUM’s ratings here.

Papa John's International, Inc. (PZZA)

PZZA is a pizza restaurant franchise operating in the following segments - Domestic Company-Owned Restaurants, North America Commissaries, North America Franchising, and International Operations. It operates and franchises pizza delivery and carryout restaurants under its trademark internationally.

On November 4, 2020, PZZA’s Board of Directors approved a new share repurchase program for up to $75 million of the company’s common stock, representing approximately 3.0% of the company’s currently outstanding common stock. This program demonstrates PZZA’s commitment to value creation in the near and long term, as well as the confidence in Papa John’s future.

PZZA’s revenues have increased 17.1% year-over-year to $472.94 million in the third quarter ended September 30, 2020, primarily due to strong comparable sales results for North America restaurants, including 18.2% for company-owned restaurants and 25.6% for franchised restaurants. Operating profit increased 398.3% from the year-ago value to $24.55 million, while its Non-GAAP EPS increased substantially from the negative year-ago value to $0.35 over this period.

The consensus EPS estimate of $0.46 for the about-to-be-reported quarter ended December 31, 2020 indicates a 24.3% rise year-over-year. The company has an impressive earnings surprise history as well, as it beat the street EPS estimates in three out of trailing four quarters. The consensus revenue estimate of $465.72 million in the fourth quarter represents an 11.5% rise from the year-ago value. The stock has gained 22.2% year-to-date.

It’s no surprise that PZZA has an overall rating of B which translates to Buy in our POWR Ratings system. PZZA has a grade of B for Quality and Value, and an A for Growth. Of the 47 stocks in the Restaurants industry, it is ranked #4.

Click here to see the additional POWR Ratings for PZZA (Stability, Momentum, and Sentiment).

Jack in the Box Inc. (JACK)

JACK operates and franchises over 2,200 Jack in the Box quick-service restaurants. Jack in the Box is a hamburger chain, which offers a selection of products, including tacos, fries, specialty sandwiches, and ice cream shakes, among others.

JACK’s revenues have increased 10% year-over-year to $338.54 million in the fiscal first quarter ended January 17, 2021. Its adjusted EBITDA had increased 33.6% from the year-ago value to $102.35 million, while non-GAAP operating EPS improved 84.6% over the same period to $2.16.

Analysts expect JACK’s EPS to rise 146% year-over-year to $1.23 in the current quarter ending March, 2021. The consensus revenue estimate of $247.36 million for the current quarter indicates a 14.4% rise year-over-year. The stock has gained 19.3% over the past six months.

JACK is rated B which equates to Buy in our POWR Ratings system. Jack has a grade of B for Value, Quality and Growth. It is currently ranked #8 of 47 stocks in the same industry.

The POWR Ratings have also graded JACK for Stability, Sentiment, and Momentum. Get all of JACK’s ratings here.

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YUM shares were unchanged in after-hours trading Tuesday. Year-to-date, YUM has declined -3.14%, versus a 3.64% rise in the benchmark S&P 500 index during the same period.



About the Author: Rishab Dugar

Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands.

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