Restaurants increase convenience and give many people a place to unwind. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough. This makes spending somewhat unpredictable and has held back the industry over the past six months as its 1.6% gain has trailed the S&P 500 by 7.3 percentage points.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. With that said, here is one resilient restaurant stock pinned to our Google Maps and two that may face trouble.
Two Restaurant Stocks to Sell:
Portillo's (PTLO)
Market Cap: $337.9 million
Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ:PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.
Why Are We Out on PTLO?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.8% for the last two years
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $4.61 per share, Portillo's trades at 22.5x forward P/E. To fully understand why you should be careful with PTLO, check out our full research report (it’s free).
First Watch (FWRG)
Market Cap: $748 million
Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ:FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.
Why Does FWRG Fall Short?
- Negative free cash flow raises questions about the return timeline for its investments
- Low returns on capital reflect management’s struggle to allocate funds effectively
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
First Watch is trading at $12.09 per share, or 65.2x forward P/E. Check out our free in-depth research report to learn more about why FWRG doesn’t pass our bar.
One Restaurant Stock to Watch:
McDonald's (MCD)
Market Cap: $171.9 billion
With nicknames spanning Mickey D's in the U.S. to Makku in Japan, McDonald’s (NYSE:MCD) is a fast-food behemoth known for its convenience and broken ice cream machines.
Why Are We Positive on MCD?
- Fast expansion of new restaurants to reach markets with few or no locations is justified by its same-store sales growth
- Attractive franchise model leads to wonderful unit economics and a best-in-class gross margin of 57.2%
- MCD is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its growing cash flow gives it even more resources to deploy
McDonald’s stock price of $242.69 implies a valuation ratio of 18.4x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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