The restaurant industry has been rebounding from the pandemic-driven pullback. Franchise restaurants have fared better during the pandemic and the recovery from it. The fast-casual restaurant market is expected to reach $209.10 billion by 2027, growing at a CAGR of 10.6%.

According to the National Restaurant Association, restaurant sales trended higher despite broad-based price increases this year. Eating and drinking places generated total sales of $85 billion on a seasonally adjusted basis in the past month.

Yelp Inc. (YELP) recently released its 2022 State of the Restaurant Industry Report, which reported a solid on-premises dining rebound and a robust takeout demand.

Given the favorable prospects of the market, the fundamentally strong restaurant stocks Arcos Dorados Holdings Inc. (ARCO), Denny’s Corporation (DENN), and Good Times Restaurants Inc. (GTIM) might be solid buys. These stocks look undervalued at their current price level.

Arcos Dorados Holdings Inc. (ARCO)

ARCO, based in Montevideo, Uruguay, operates as a McDonald’s Corporation (MCD) restaurant franchisee. The company possesses the exclusive right to own, use, and grant franchises of McDonald’s restaurants in Latin America and the Caribbean.

In May, ARCO announced its intent to redeem $123 million of its outstanding 6.625% senior notes due 2023. In March, the company declared a dividend of $0.15 per share, payable to all Class A and Class B shareholders in four quarterly installments. This reflects upon the company’s shareholder return ability.

In terms of its forward Price/Sales, ARCO is trading at 0.48x, 44.4% lower than the industry average of 0.86x. Its forward EV/Sales multiple of 0.90 is 12% lower than the industry average of 1.02.

ARCO’s total revenues increased 40.9% year-over-year to $790.68 million in the first quarter ended March 31. Its adjusted EBITDA grew 228% from the year-ago value to $78.50 million, while its net income improved 183% year-over-year to $24.63 million. The company’s EPS increased 185.7% from the same period last year to $0.12. ARCO’s net income has grown at a CAGR of 27.2%, and its EPS at a CAGR of 27.7% over the past three years.

The consensus EPS estimate of $0.04 for the fiscal second quarter (ending June 2022) indicates a 118.7% improvement year-over-year. The consensus revenue estimate of $728.29 million for the same quarter reflects a 22.9% increase from the same period last year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.

The stock has gained 13.5% over the past year and 21.3% year-to-date to close its last trading session at $7.07.

ARCO’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

ARCO is rated an A in Sentiment and B in Growth and Value. Within the B-rated Restaurants industry, it is ranked #2 of 53 stocks. To see additional POWR Ratings for Momentum, Stability, and Quality for ARCO, click here.

Denny’s Corporation (DENN)

DENN operates full-service restaurant chains under Denny’s brand through its subsidiary, Denny’s, Inc. The company owns multiple franchised, licensed, and company restaurants globally.

DENN’s forward P/E multiple of 10.27 is 13.2% lower than the industry average of 11.82.

In the first quarter ended March 30, DENN’s total operating revenue increased 28% year-over-year to $103.11 million. Its operating income grew 141.3% year-over-year to $13.31 million. The company’s adjusted net income improved 1,448.6% from the prior-year quarter to $6.98 million, while adjusted net income per share was $0.11, up 1,000% year-over-year. DENN’s net income and EPS have grown at a CAGR of 15.8% over the past three years.

Analysts expect DENN’s revenue for the second quarter (ending June 2022) to be $112.61 million, indicating a 6.1% year-over-year growth. The company’s EPS for the same quarter is expected to be $0.15.

DENN’s stock has declined 1.6% intraday to close its last trading session at $8.78.

It is no surprise that DENN has an overall B rating, which translates to Buy in our POWR Ratings system. The stock has a B grade for Growth, Value, and Quality. In the Restaurants industry, it is ranked #11.

Beyond what we’ve stated above, we have also given DENN grades for Momentum, Stability, and Sentiment. Get all the DENN ratings here.

Good Times Restaurants Inc. (GTIM)

GTIM engages in the U.S. restaurant business as the operator of upscale quick-service drive-through dining restaurant Good Times Burgers & Frozen Custard and full-service upscale casual dining restaurant Bad Daddy’s Burger Bar.

In terms of its trailing-12-months PEG, GTIM is trading at 0.01x, 92% lower than the industry average of 0.13x. Its trailing-12-months P/E multiple of 2.64 is 76.8% lower than the industry average of 11.37.

For the second quarter ended March 29, GTIM’s total net revenue increased 15.1% to $33.60 million. This can be attributed to a rise of 15.1% from the prior-year quarter in restaurant sales to $33.36 million. GTIM’s revenue has grown at a CAGR of 8.2% over the past three years, while its EBIT has increased at a CAGR of 242.2% over the same period. Its EBITDA has grown at a 26.2% CAGR over the past three years.

GTIM’s stock has gained marginally intraday to close its last trading session at $2.71.

GTIM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to Strong Buy in our POWR Rating system.

GTIM has an A grade for Value and a B for Growth, Momentum, Sentiment, and Quality. Within the Restaurants industry, it is ranked #1. Click here to see the additional POWR Ratings for GTIM (Stability).

ARCO shares were trading at $6.94 per share on Wednesday afternoon, down $0.13 (-1.84%). Year-to-date, ARCO has gained 19.65%, versus a -20.93% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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