3 Buy-Rated Fast Food Stocks to Add to Your Portfolio
The fast-food industry went through significant challenges in 2020 because of the pandemic, but the industry is expected to have a strong recovery. According to Allied Market Research, the industry was valued at about $647 billion in 2019 and is expected to reach more than $965 billion in 2027.
Restaurants and fast-food operators have had mixed returns this year because of the Delta variant, vaccine mandates, labor shortages, and ongoing supply shortages. The Advisorshares Restaurant ETF (EATZ) has declined by about 3.2% year-to-date (YTD).
McDonald’s stock price has jumped by more than 18.7% this year, underperforming the S&P 500 index, which has risen by more than 25% this year and is sitting at an all-time high.
The average analyst estimate for the stock is $271, which is a bit higher than the current price of $255, with the most recent bullish calls were from Morgan Stanley, Barclay’s, and Credit Suisse.
Analysts are bullish on McDonald’s because they believe that the company will keep growing as the pandemic ends. This was evidenced by the company’s strong performance in the third quarter which showed its global sales rose by 13%, helped by the strong recovery in the UK.
The company’s revenue was more than $6.2 billion, which was better than the median estimate by about $158 million. The company’s earnings per share also beat by about 29 cents. Analysts expect that the company will grow its revenue to more than $23.18 billion this year and $24.66 billion in 2022. In the same period, the earnings per share is expected to grow from $9.42 to $10.12.
McDonald’s also has a strong track record of returning cash to shareholders. It has a forward dividend yield of about 2.18% and a comfortable payout ratio of 58%. Also, the stock is relatively fairly valued since it has a forward PE of about 25.06.
Starbucks has had a relatively weak year as investors remain pessimistic about the company’s growth, particularly in China, and ongoing labor challenges. However, the stock has still managed to rise by more than 9% this year. Analysts average target price expectations for SBUX is $124, which is 7.8% above the current price. Yahoo Finance data confirms this price range as analysts expect it to rise to about $122.
The stock’s performance is partly because of the relatively weak results the company has released this year. In the fiscal fourth quarter, the company had $8.1 billion in revenue, which was about $77 million lower than what analysts were expecting. It also missed forecasts in the second and third quarters.
The bullish case for SBUX is centered on several reasons. First, the current labor challenges will ease with time as countries recover, and the company’s revenue and earnings growth are expected to continue. For example, expectations are that revenue will rise from $32.6 billion in 2021 to $35.5 billion in the following year. Its EPS will rise from $3.44 to $4.
Another reason, the company has better forward growth metrics than some of its peers. For example, it has a forward revenue growth rate of 14.73% while companies like McDonald’s, Yum, and Restaurant Brands have a forward revenue metric of less than 10%. Finally, Starbux is a good dividend payer. It has a dividend yield of about 1.60% and a payout of 57%.
Chipotle Mexican Grill (CMG)
Chipotle Mexican Grill has had a stellar year as its stock price has jumped by more than 29%, outperforming the S&P 500 and other restaurant stocks.
Still, analysts expect that the stock has more room to run with an average price target of $1,997, according to TipRanks, which is substantially higher than current levels.
The biggest contributor to this bullish outlook is Chipotle has managed to grow its digital sales substantially in the past few years. This growth helped the company do well during the Covid-19 pandemic and these sales helped the company grow its revenue to a record high of more than $2 billion.
In addition, while the company is facing margin pressure as costs rise, it has been able to offset this performance by boosting prices. It recently hiked prices for burritos by 40 cents in a bid to cover rising costs. Indeed, the company boosted its margins by about 400 basis points in the most recent quarter.
Another reason, the company is still growing at a relatively faster pace. For example, it expects to grow its American stores to more than 6,000. And because of this success, it will be able to expand its business in other countries.
Still, the biggest challenge for Chipotle is that its stock is priced for perfection. The shares are trading at a forward PE ratio of more than 70, which is significantly higher than other restaurant stocks.