Despite the macroeconomic challenges, the restaurant industry’s long-term outlook remains promising. Therefore, I present quality restaurant stocks offering a potential bargain for investors: Domino’s Pizza Group plc (DPUKY) and El Pollo Loco Holdings, Inc. (LOCO), currently trading under $10.

The National Restaurant Association’s 2023 State of the Restaurant Industry report indicates that the food service industry is expected to reach $997 billion in sales in 2023, with a projected growth of 500,000 jobs, despite rising food costs and increasing competition.

The restaurant industry is embracing technology to automate operations, with AI-powered voice technology optimizing phone and drive-thru orders, and self-service kiosks providing customization and flexibility for customers.

Moreover, self-service technology is expected to evolve further and could soon be integrated into in-car digital assistants, offering advantages for restaurants in terms of efficiency and customer convenience. In addition, the use of GPS tracking systems is also creating a seamless and transparent customer experience.

Consumers are also increasingly opting for food delivery services, and there is a growing emphasis on healthy eating, with many delivery services offering healthy food options. Additionally, online food delivery services are expanding their networks, allowing consumers to order from a wide range of restaurants and cuisines.

As a result, according to IMARC Group, the online food delivery market is expected to grow at a CAGR of 10% until 2028.

Here are the stocks mentioned above:

Domino’s Pizza Group plc (DPUKY)

Based in Milton Keynes, the United Kingdom, DPUKY owns, operates, and franchises several Domino’s Pizza stores. It operates stores in the United Kingdom and the Republic of Ireland and also leases its stores.

In terms of forward EV/Sales, DPUKY is currently trading at 2.80x, which is 14.4% lower than its five-year average of 3.28x. Its forward EV/EBITDA of 13.74x is 8.7% lower than its five-year average of 15.05x. Moreover, its forward P/S multiple of 2.03 is 9.8% lower than its five-year average of 2.25.

The company pays an annual dividend of $0.33, which translates to a yield of 4.34% at the current price level, higher than its four-year average dividend yield of 3.38%.

During the year that ended December 25, 2022, DPUKY’s group revenue increased 7% year-over-year to £600.30 million ($751.64 million). Its gross profit rose 1.8% year-over-year to £273.50 million (342.45 million). Its profit for the period increased 4.2% year-over-year to £81.60 million ($102.17 million).

Also, the company’s earnings per share from continuing and discontinued operations stood at 18.7 pence.

DPUKY’s revenue is expected to rise 7.9% year-over-year to $771.65 million in the fiscal year 2023.

Over the past six months, the stock has gained 36.6%, closing the last trading session at $7.51. It has gained 5% over the past month.

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

DPUKY has a B grade for Momentum, Stability, and Quality. Within the A-rated Restaurants industry, it is ranked #6 out of 46 stocks.

Beyond the POWR Ratings stated above, we have also rated DPUKY for Growth, Value, and Sentiment. Get all DPUKY ratings here.

El Pollo Loco Holdings, Inc. (LOCO)

LOCO develops, franchises, licenses, and operates quick-service restaurants under the El Pollo Loco brand.

LOCO’s forward non-GAAP P/E of 15.03x is 23.7% lower than its five-year average of 19.70x. Its trailing-12-month P/B of 1.35x is 25.3% lower than its five-year average of 1.80x. Also, its forward P/S multiple of 0.79 is 30% lower than its five-year average of 1.13.

On April 18, 2023, LOCO announced that it had reintroduced its popular Shredded Beef Birria menu for the second year. The authentic Mexican flavor can be enjoyed in various entrees like crunchy tacos, grilled burritos, or overstuffed quesadillas, paired with a Consomé Dipping Sauce.

This menu item was a record-breaking limited-time offer for the brand across sales and social engagement last year, and the company is looking to replicate that success this year.

LOCO’s total revenue increased 22.5% year-over-year to $115.92 million in the fiscal fourth quarter that ended December 28, 2022. The company’s income from operations grew 12.9% from its prior-year quarter to $9.51 million. Its net income rose 5.8% from the prior-year quarter to $6.54 million.

Also, the company’s EPS increased 5.9% year-over-year to $0.18 and adjusted EBITDA grew 4.3% year-over-year to $13.25 million.

Analysts expect LOCO’s EPS to increase 54.3% year-over-year to $0.11 in the fiscal first quarter that ended March 2023. Its revenue is expected to rise 3.1% year-over-year to $113.42 million in the same quarter. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters.

The stock has soared 14.7% over the past nine months and 6.8% over the past month, closing the last trading session at $9.99.

LOCO’s robust fundamentals are reflected POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system.

Also, the stock has a B grade for Growth, Value, and Momentum. LOCO is ranked #11 in the same industry.

In addition to the POWR Rating grades I’ve just highlighted, one can see LOCO’s ratings for Stability, Quality, and Sentiment here.

What To Do Next?

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DPUKY shares were unchanged in premarket trading Thursday. Year-to-date, DPUKY has gained 1.75%, versus a 7.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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