In the article, we will discuss the six restaurant stocks BMO Capital Markets is talking about in its recent report about the restaurant sector. To skip the detailed analysis of the firm and its recent report, go directly to BMO Capital is Talking About These 3 Restaurant Stocks.

BMO Capital Markets

BMO Capital Markets handles the investment banking side of the Canadian Bank of Montreal (NYSE:BMO) and provides financial services to its clients. The firm provides equity and debt underwriting, corporate lending and project financing, mergers and acquisitions advisory services, securitization, treasury management, market risk management, debt and equity research, and institutional sales and trading services. BMO Capital Markets operates from 45 offices worldwide, with 16 of them in North America. Since BMO Capital Markets’ inception in 1987, the firm has made around 50 investments and two diversity investments.

In this article, we will cover the six restaurant stocks that were mentioned in the recent report covered by the BMO Restaurants and Beverages analyst Andrew Strelzik.

Andrew Strelzik

Andrew Strelzik is a senior analyst at BMO Capital Markets and currently covers the restaurant division at the firm. From 2015 to 2017, Strelzik was named the “All-America Research Team Rising Star” three years in a row by Institutional Investor.

Andrew Strelzik received his BA in political economy from The Murphy Institute at Tulane University. He joined BMO Capital Markets in 2008 as an equity research associate covering the food sector, including packaged food, protein, and agribusiness companies. He was promoted to senior analyst in 2014.

Report: The More Things Change, the More They Stay the Same

This report was posted by BMO Capital Markets on August 23, 2022. The report included the six preferred restaurants of BMO Capital and a comparison with 12 others in the sector. The piece revolves around the rising stability in the restaurant sector in Q2 2022 after softening low-income spending in the past few years, especially the post-pandemic blow to the restaurant sector. The report was generated in light of the inevitable slowdown in restaurant spending and highlighted the six preferred restaurant stocks of BMO Capital Markets in the current economic conditions.

Key Points of the Report

The report states that low-income spending has remained stable in limited service brands. On the other hand, casual and fast-casual restaurants reported no significant spending behavior change among their middle or upper-income consumers. Furthermore, the report mentions that “resilient restaurant spending combined with easing inflation are encouraging, but we remain concerned an eventual slowdown in broader restaurant spending is a likely outcome.” 

For BMO Capital Markets, Wingstop Inc. (NASDAQ:WING), Papa John’s International, Inc. (NASDAQ:PZZA), and McDonald’s Corporation (NYSE:MCD) remain its “favorite ideas to capitalize on potential consumer trade down in restaurants”. According to the firm, these companies had the most resilient same-store performance in 2008 and 2009’s Great Recession and are expected again to withstand the current economic pressures. Furthermore, Strelzik mentioned that Papa John’s International, Inc. (NASDAQ:PZZA) and Wingstop Inc. (NASDAQ:WING) have the potential to accelerate sales trends in future quarters, and the latter is well-positioned to take advantage of lower input costs. The chicken wing prices took a leap downwards to $1.20 per pound in August from $1.70 in mid-July.

The other three firms, Brinker International, Inc. (NYSE:EAT), Bloomin’ Brands, Inc. (NASDAQ:BLMN), and Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY), are BMO Capital’s “preferred ideas on the high end as significant multiple compression creates the most attractive risk/rewards among similar companies”. Among the companies, Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) has several potential sales drivers positioning the company for under-appreciated demand resiliency. Furthermore, the company’s strong cash position provides a significant upside to its shares.

Apart from the six significant stocks, the recession scenario analysis for the fast-casual dining sector was also provided. Moreover, the report included EV/EBITDA valuations, management commentary on consumer spending post-FQ2 earnings, and stock performance of 16 restaurant stocks, including the six prominent companies.

Our Methodology

The stocks mentioned in the article were taken from the report named “The More Things Change, the More They Stay the Same” by BMO Capital Markets analyst Andrew Strelzik. BMO Capital has provided analyst coverage for each stock in the last six months.

The stocks are listed according to their hedge fund sentiment in ascending order, which has been gauged from Insider Monkey’s database of 895 elite hedge funds as of Q2 2022.

BMO Capital is Talking About These Restaurant Stocks

6. Wingstop Inc. (NASDAQ:WING)

Number of Hedge Fund Holders: 20

Wingstop Inc. (NASDAQ:WING) is an American chain of aviation-themed restaurants, offering chicken wings. The company is headquartered in Texas and has over 1,400 restaurants. BMO Capital reported its latest rating on May 18, where Andrew Strelzik reiterated a Buy rating on Wingstop Inc. (NASDAQ:WING)’s shares with a $140 price target, seeing a 4.82% upside. Wingstop Inc. (NASDAQ:WING) is among BMO’s top 15 stock picks.

Wingstop Inc. (NASDAQ:WING) has recently started increasing its brand awareness and expects this move to benefit its topline. The restaurant increased its funding for national marketing per store from 4% to 5%, and the extra sum will be used for advertising. Furthermore, the company plans to use $40-$50 million for customer targeting and enhance its marketing capability. In the second quarter of 2022, the company management noted an apparent pullback in spending from low-income household consumers at Wingstop Inc. (NASDAQ:WING).

At the end of Q2 2022, 20 hedge funds held bullish positions in Wingstop Inc. (NASDAQ:WING), with Fundsmith LLP holding the most prominent position, comprising 825,464 shares valued at $61.72 million.

Wingstop Inc. (NASDAQ:WING), Papa John’s International, Inc. (NASDAQ:PZZA), and McDonald’s Corporation (NYSE:MCD) are some of the restaurant stocks BMO Capital is talking about.

5. Papa John’s International, Inc. (NASDAQ:PZZA)

Number of Hedge Fund Holders: 20

Papa John’s International, Inc. (NASDAQ:PZZA) is the fourth largest pizza restaurant chain in the US and the third-largest pizza delivery company. The company operates in approximately 50 countries through 5,500 locations.

Papa John’s International, Inc. (NASDAQ:PZZA) is a healthy dividend stock with a decent cash position. For FY 2022, the company has cash obligations of around $62.59 million, including interest payments, debt, operating, and finance leases. The company has over $52 million in cash and it has paid out $25.1 million in dividends in the first half of 2022, as well as stock repurchases of $73.56 million.

As of September 20, Papa John’s International, Inc. (NASDAQ:PZZA) has a dividend yield of 2.21%. The company also announced a quarterly dividend increase of 20% to $0.42 per share in early August.

BMO Capital analyst Andrew Strelzik posted his latest rating on Papa John’s International, Inc. (NASDAQ:PZZA) in early May. Strelzik maintained an Outperform rating on the company shares with a $130 price target. On August 17, BTIG analyst Peter Saleh reaffirmed a Buy rating on Papa John’s International, Inc. (NASDAQ:PZZA) shares and increased his price target to $130 from $125. 

Here is what Artisan Partners has to say about Papa John’s International, Inc.  in its Q3 2021 investor letter:

“Papa John’s 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 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.”

4. Brinker International, Inc. (NYSE:EAT)

Number of Hedge Fund Holders: 23

Brinker International, Inc. (NYSE:EAT) operates Chili’s and Maggiano’s Little Italy restaurants in the US and internationally. According to the company’s latest quarterly report, it operated 1,596 Chili’s Grill & Bar restaurants and 54 restaurants under Maggiano’s Little Italy brand name. As of September 21, Brinker International, Inc. (NYSE:EAT) has a PE ratio of 10.91 compared to the 19.71 sector average.

On August 25, BMO Capital analyst Andrew Strelzik reaffirmed an Outperform rating on Brinker International, Inc. (NYSE:EAT) and lowered the price target to $43 from $48, representing a 43% upside. The analyst mentioned that the company earnings are set to rebound to pre-pandemic levels once the inflationary pressures soften. He further added that the stock is trading at an “extremely attractive multiple.”

Brinker International, Inc. (NYSE:EAT) is expected to generate $4 billion in sales in FY2023. In case of a recession, the company is expected to generate an average of $3.846 billion in sales.

In addition to Brinker International, Inc. (NYSE:EAT), Wingstop Inc. (NASDAQ:WING), Papa John’s International, Inc. (NASDAQ:PZZA), and McDonald’s Corporation (NYSE:MCD) are some of the favorite restaurant stocks of BMO Capital Markets. 

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Disclosure: None. BMO Capital is Talking About These 6 Restaurant Stocks is originally published on Insider Monkey.