Although online food delivery has bolstered the restaurant industry, declining purchasing power and high inflation might dampen its near-term prospects. While I think Arcos Dorados Holdings Inc. (ARCO) could be an excellent addition to your portfolio, Kura Sushi USA, Inc. (KRUS) might be best avoided, given its fundamental weakness.

As per the National Restaurant Association’s 2023 State of the Restaurant Industry report, the food service industry is forecast to reach $997 billion in sales in 2023, driven partly by higher menu prices.

Moreover, with remote work disrupting traditional mealtimes, restaurants are exploring ways to attract customers at all hours with creative offers, such as off-hours or slow-day value deals, flexible pricing, multi-course meal bundles, meal kits, subscriptions, and even merchandise.

Moreover, app-enabled food delivery services have become a crucial aspect of the restaurant industry, enabling them to reach out to new customers digitally. This has resulted in a growth rate of more than 20% for online food ordering and restaurant delivery in the past five years. As a result, online food delivery rates are expected to grow to more than $220 billion by 2025.

However, according to a survey by TD Bank, the top challenge for restaurants this year is inflation. Also, labor shortages, supply chain disruptions, and rising interest rates continue to impact the industry.

Stock to Buy:

Arcos Dorados Holdings Inc. (ARCO)

Based in Montevideo, Uruguay, ARCO operates as a franchisee of McDonald’s restaurants. The company has the exclusive right to own, operate, and grant franchises of McDonald’s restaurants in 20 countries and territories.

ARCO’s forward EV/Sales of 0.74x is 34.3% lower than the industry average of 1.12x. Its forward Price/Sales multiple of 0.41 is 52.6% lower than the industry average of 0.86.

Its trailing-12-month asset turnover ratio of 1.45x is 40.2% higher than the 1.03x industry average. Its trailing-12-month ROTC of 8.96% is 41.2% higher than the 6.35% industry average.

On March 14, ARCO announced a quarterly dividend of $0.05 per share of common stock payable on June 28, 2023.

ARCO pays an annual dividend of $1.48, which translates to a yield of 2.36% at the current market price. It has a four-year average dividend yield of 1.19%.

ARCO’s total revenues increased 30.5% year-over-year to $1.02 billion during the fourth quarter that ended December 31, 2022. Its adjusted EBITDA grew 2.4% from the year-ago quarter to $114.06 million and its net income increased 19.8% year-over-year to $54.67 million. Also, the company’s EPS increased 18.2% year-over-year to $0.26.

Analysts expect ARCO’s revenue for the first fiscal quarter ended March 2023 to come in at $835.79 million, indicating a 5.7% year-over-year growth. The company’s EPS is expected to increase 39.2% year-over-year to $0.17. The stock has surpassed the revenue estimates in each of the trailing four quarters, which is impressive.

The stock gained 4.9% over the past nine months to close the last trading session at $7.25. It has a 24-month beta of 0.47.

ARCO’s POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

ARCO also has an A grade for Value and a B in Growth and Sentiment. It is ranked first out of 46 stocks in the A-rated Restaurants industry.   

For additional ratings for ARCO’s Stability, Quality, and Momentum, click here.

Stock to Sell:

Kura Sushi USA, Inc. (KRUS)

KRUS operates technology-enabled Japanese restaurants in the United States. The company’s restaurants provide Japanese cuisine through an engaging revolving sushi service model, which is known as Kura Experience’.

KRUS’s forward EV/Sales of 3.88x is 245.2% higher than the industry average of 1.12x. Its forward Price/Sales multiple of 3.51 is 306% higher than the industry average of 0.86.

Its trailing-12-month asset turnover ratio of 0.79x is 23.9% lower than the 1.03x industry average. Its trailing-12-month gross profit margin of 18.56% is 47% lower than the 35% industry average.

KRUS’ total restaurant operating costs increased 35.7% year-over-year to $37.78 million during the fiscal second quarter that ended February 28, 2023. Its net loss came in at $1.02 million. Also, its net loss per class A and class B shares came in at $0.10.

Street expects KRUS’ EPS to decline 36% year-over-year to negative $0.03 for the current fiscal quarter ending May 2023. Its revenue is expected to come in at $49.88 million for the same quarter.

The stock has declined 11.4% over the past six months to close its last trading session at $67.3. Its 24-month beta is 1.82.

KRUS’ POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system.

KRUS has a D grade in Value, Sentiment, Quality, and Stability. It is ranked last in the same industry.   

Beyond the POWR Rating grades we’ve stated above, KRUS’s rating for Growth and Momentum can be seen here.

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ARCO shares were unchanged in premarket trading Wednesday. Year-to-date, ARCO has declined -12.70%, versus a 7.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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