In this article, we discuss the 6 restaurant stocks to watch amid tightening spending.
Recession fears in the United States are gathering pace as inflation shows no signs of cooling down and the central bank signals that another rate hike is on the way. In this bleak environment, the restaurant sector has come under increased scrutiny as investors desperately seek value for money. The pandemic shutdowns and increases in energy prices have negatively impacted restaurant sales in recent months.
According to the US Bureau of Labor Statistics, the prices for food eaten away from home have risen more than 7% in the last year. When coupled with the increase in prices of basic necessities like gas, toilet paper, and groceries, which people have been spending more on as recession fears rise, restaurants across the US have witnessed sales deteriorate. This slowdown comes merely months after a post-pandemic mini-boom for the industry that had resulted in increased optimism that the restaurant sector would recover from the virus lows.
The post-pandemic boom had led to a rally in the share prices of other cyclical stocks like The Walt Disney Company (NYSE:DIS), Walmart Inc. (NYSE:WMT), and Marriott International, Inc. (NASDAQ:MAR) as well. However, as consumer spending patterns shift, these stocks, along with the restaurant sector, have started sliding. The market selloff has created a buying opportunity and many investment advisors are urging their clients to take advantage of this in light of updated inflation numbers and future forecasts.
For example, BMO Capital Markets analyst Andrew Strelzik, in a recent note to investors on August 23, said that there was reason to be cautious about the restaurant industry despite some of the resilient restaurant spending trends and encouraging signs that potentially lower inflation could ease a bit. The comments of Strelzik resonate in the restaurant sector in general. Restaurant Brands International CEO Jose Cil recently said that he had not seen “significant changes in consumer behavior yet”, echoing remarks made by Yum Brands CEO David Gibbs.
In his note, Strelzik underlined that “measures to tamp down inflation, softening consumer health metrics, and evidence of “tightening spending” would offset the impact of decreasing energy prices and that it was “likely” that an “eventual slowdown in restaurant spending” would be the outcome. The analyst said that such a situation would be ideal to capitalize on a potential consumer trade-down effect as a recession was largely priced into the shares of certain top picks in the sector, creating an attractive risk-reward profile.
Our Methodology
The companies that operate in the restaurant sector and are being monitored by BMO Capital Markets analyst Andrew Strelzik were selected for the list. The business fundamentals of these firms and the latest updates related to them are also discussed to provide some additional context. Data from around 900 elite hedge funds tracked by Insider Monkey in the second quarter of 2022 was used to identify the number of hedge funds that hold stakes in each firm.
Photo by Syed Ahmad on Unsplash
Restaurant Stocks to Watch Amid “Tightening Spending”
6. Papa John’s International, Inc. (NYSE:PZZA)
Number of Hedge Fund Holders: 20
Papa John’s International, Inc. (NYSE:PZZA) owns and runs pizza delivery restaurants across the world. On August 4, the firm posted earnings for the second quarter of 2022, reporting earnings per share of $0.74, missing analyst expectations by $0.01. The revenue over the period was $522 million, up over 1.5% compared to the revenue over the same period last year and missing market estimates by $9 million. However, the firm announced a 20% increase in the annual dividend rate and declared a third quarter dividend of $0.42 per share.
On August 17, BTIG analyst Peter Saleh maintained a Buy rating on Papa John’s International, Inc. (NYSE:PZZA) stock and raised the price target to $130 from $125, noting that the firm had the right strategy in place to differentiate the brand amid slower industry sales.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Starboard Value LP is a leading shareholder in Papa John’s International, Inc. (NYSE:PZZA), with 2.7 million shares worth more than $230 million.
At the end of the second quarter of 2022, 20 hedge funds in the database of Insider Monkey held stakes worth $443 million in Papa John’s International, Inc. (NYSE:PZZA), compared to 27 the preceding quarter worth $608 million.
Just like The Walt Disney Company (NYSE:DIS), Walmart Inc. (NYSE:WMT), and Marriott International, Inc. (NASDAQ:MAR), Papa John’s International, Inc. (NYSE:PZZA) is one of the stocks feeling the heat of an economic slowdown.
In its Q3 2021 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and Papa John’s International, Inc. (NYSE:PZZA) was one of them. Here is what the fund said:
“Papa John’s International, Inc. (NYSE:PZZA) is a global operator and franchisor of pizza delivery and carryout restaurants. The company is tracking nicely against our turnaround thesis which hinges upon an improvement in store-level economics leading to accelerating growth in restaurant development activity. Improved store-level economics is being driven in part by market share gains resulting from menu innovation. New menu items—parmesan crusted Papadias, Epic Stuffed Crust, Shaq-a-roni— coupled with enhancements to the digital/loyalty platform and supportive advertising are attracting new customers to the brand, increasing frequency of its existing customers and driving higher unit volumes and returns. As a result, the company is experiencing incremental interest from new and existing franchisees to develop new restaurants. Papa John’s International, Inc. (NYSE:PZZA) opened a record 123 units in the first half of 2021 and now expects to open 220-260 new stores this year (vs. 140-180 previously)—most of which are outside of the US. Combined with ample white space globally, we believe a higher unit growth trajectory will drive an attractive and sustainable profit cycle.”
5. Wingstop Inc. (NASDAQ:WING)
Number of Hedge Fund Holders: 20
Wingstop Inc. (NASDAQ:WING) owns and runs restaurants under the Wingstop brand name. Despite rising inflation that has led to increased operating expenditures, the earnings per share of the company in the second quarter of 2022 came in 25% above expectations on Wall Street. During the period, there was also a more than 13% year-over-year jump in revenue. System-wide sales increased 7.5% to $633 million as well. The firm said the results demonstrated the resiliency and underlying strength of the Wingstop brand.
On August 8, Cowen analyst Andrew Charles maintained an Outperform rating on Wingstop Inc. (NASDAQ:WING) stock and raised the price target to $150 from $140, backing the firm to take advantage of a national ad budget increase and the addition to Uber Eats.
Among the hedge funds being tracked by Insider Monkey, London-based investment firm Fundsmith LLP is a leading shareholder in Wingstop Inc. (NASDAQ:WING), with 825,464 shares worth more than $61 million.
At the end of the second quarter of 2022, 20 hedge funds in the database of Insider Monkey held stakes worth $184 million in Wingstop Inc. (NASDAQ:WING), compared to 21 the preceding quarter worth $211 million.
In its Q2 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Wingstop Inc. (NASDAQ:WING) was one of them. Here is what the fund said:
“Other new buys included Wingstop. Wingstop Inc. (NASDAQ:WING), meanwhile, in the consumer discretionary sector, is doing to chicken wings what Domino’s did to pizza. With a strong digital model, the franchise-based business has a long runway for growth with an existing base of 1,500 stores expanding to potentially 6,000 units and compelling franchisee economics.”
4. Brinker International, Inc. (NYSE:EAT)
Number of Hedge Fund Holders: 23
Brinker International, Inc. (NYSE:EAT) owns and runs casual dining restaurants. The stock has fallen in the past few weeks after the firm guided profit for the coming quarter below expectations on Wall Street. The company said the primary reasons for doing so were related to higher commodity costs, restaurant expenses, the impact of the additional operating week in fiscal 2021, and increased restaurant labor costs. The firm guided 2023 revenue to roughly $4 billion, in line with analyst estimates.
On August 29, investment advisory Deutsche Bank maintained a Hold rating on Brinker International, Inc. (NYSE:EAT) stock and lowered the price target to $31 from $33. Analyst Brian Mullan issued the ratings updated.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Tremblant Capital is a leading shareholder in Brinker International, Inc. (NYSE:EAT), with 815,803 shares worth more than $17 million.
At the end of the second quarter of 2022, 23 hedge funds in the database of Insider Monkey held stakes worth $105 million in Brinker International, Inc. (NYSE:EAT), compared to 27 in the previous quarter worth $170 million.
In addition to The Walt Disney Company (NYSE:DIS), Walmart Inc. (NYSE:WMT), and Marriott International, Inc. (NASDAQ:MAR), Brinker International, Inc. (NYSE:EAT) is one of the stocks that hedge funds are monitoring as consumer spending patterns change.
3. Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY)
Number of Hedge Fund Holders: 31
Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) owns and runs entertainment and dining venues. In late July, the company announced that it had closed the acquisition of Main Event from Ardent Leisure Group Limited. Back in early April, the former had purchased the latter in a deal worth $835 million. The firm expects accelerated, profitable growth under the deal and believes it will unlock additional value for its shareholders. Main Event is a family entertainment firm with 50 stores in the US.
On July 13, Truist analyst Jake Bartlett maintained a Buy rating on Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) stock and lowered the price target to $57 from $67, noting that the firm had put out worse-than-expected near-term sales trends.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Hill Path Capital is a leading shareholder in Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY), with 5 million shares worth more than $164 million.
At the end of the second quarter of 2022, 31 hedge funds in the database of Insider Monkey held stakes worth $478 million in Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY), compared to 36 the preceding quarter worth $762 million.
2. Bloomin’ Brands, Inc. (NASDAQ:BLMN)
Number of Hedge Fund Holders: 35
Bloomin’ Brands, Inc. (NASDAQ:BLMN) owns and runs fine dining restaurants. In late July, the firm posted earnings for the second quarter of 2022, reporting earnings per share of $0.68, beating analyst expectations by $0.06. The revenue over the period was $1.1 billion, up more than 4% compared to the revenue over the same period last year and beating expectations by $20 million. The firm raised guidance numbers for the coming quarter but said the profit benefits from the increased revenues would be offset by higher than expected inflation.
On July 18, Morgan Stanley analyst John Glass maintained an Equal Weight rating on Bloomin’ Brands, Inc. (NASDAQ:BLMN) stock and lowered the price target to $21 from $26, noting that the restaurant sector would face softening sales as consumers face rising pressures.
At the end of the second quarter of 2022, 35 hedge funds in the database of Insider Monkey held stakes worth $219 million in Bloomin’ Brands, Inc. (NASDAQ:BLMN), up from 34 the preceding quarter worth $337 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Tremblant Capital is a leading shareholder in Bloomin’ Brands, Inc. (NASDAQ:BLMN), with 2.6 million shares worth more than $43 million.
In its Q1 2022 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Bloomin’ Brands, Inc. (NASDAQ:BLMN) was one of them. Here is what the fund said:
“We initiated a new position in Bloomin’ Brands, Inc. (NASDAQ:BLMN), in the consumer discretionary sector. The owner and operator of upscale casual dining brands, including Outback Steakhouse and Bonefish Grill, the company utilized the challenges of the COVID-19 pandemic to implement new productivity operations for its waitstaff and focus on improving corporate margins. As we transition from pandemic to endemic, the company should be able to meet the rebound in restaurant attendance with an improved cost structure and better operating leverage. We believe these long-term improvements and increased demand for dining are not reflected in the current share price.”
1. McDonald’s Corporation (NYSE:MCD)
Number of Hedge Fund Holders: 50
McDonald’s Corporation (NYSE:MCD) owns and runs fast food restaurants. On August 11, the company announced that it would reopen restaurants in Ukraine that had been closed as a result of the Russian invasion of the country. The firm is still paying over 10,000 employees in the European country in anticipation of the reopening. The company expects to start the reopening process in capital Kyiv. This will be followed by reopening in other parts of Ukraine, especially the Western part where the firm has a strong presence.
On August 16, BMO Capital analyst Andrew Strelzik maintained an Outperform rating on McDonald’s Corporation (NYSE:MCD) stock and raised the price target to $300 from $285, noting that the firm was realizing accelerated growth and share gains in Europe.
At the end of the second quarter of 2022, 50 hedge funds in the database of Insider Monkey held stakes worth $2.3 billion in McDonald’s Corporation (NYSE:MCD), compared to 58 the preceding quarter worth $2.7 billion.
Among the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm Bridgewater Associates is a leading shareholder in McDonald’s Corporation (NYSE:MCD), with 2 million shares worth more than $511 million.
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Disclosure. None. 6 Restaurant Stocks to Watch Amid “Tightening Spending” is originally published on Insider Monkey.
