While labor shortage has been marring the restaurant industry, according to a forecast by restaurant consultancy Aaron Allen & Associates, up to 82% of restaurant positions could, to some extent, be replaced by robots. Automation is likely to save U.S. fast-food restaurants more than $12 billion in annual wages, the group said.

Moreover, the growing prominence of hassle-free online delivery, various discount offers, convenient payment options, etc., is driving the online food delivery market in the United States. IMARC Group expects the market to reach $46.50 billion by 2028, exhibiting a CAGR of 10% during 2023-2028.

Furthermore, the rising online delivery services have also led to the growth of ghost kitchens (or cloud/dark kitchens). Euromonitor predicts that the ghost kitchen market will be worth $1 trillion by 2030.

Given the solid long-term prospects of the industry, fundamentally strong restaurant stocks McDonald’s Corporation (MCD), Nathan’s Famous, Inc. (NATH), and Rave Restaurant Group, Inc. (RAVE) might be ideal buys.

However, considering the macroeconomic challenges, including labor and food cost inflation and supply chain issues, fundamentally weak restaurant stock Dutch Bros Inc. (BROS) might be best avoided now.

Stocks to Buy:

McDonald’s Corporation (MCD)

MCD and its franchisees are renowned for operating restaurants globally. The company operates through three segments: the United States (U.S.); International Operated Markets (IOM); and International Developmental Licensed Markets & Corporate (IDL).

On October 13, MCD announced an increase of 10% over the company’s previous quarterly dividend, reflecting confidence in the Accelerating the Arches growth strategy and a continued focus on driving long-term profitable growth for all stakeholders.

MCD pays $6.08 annually as dividends. This translates to a yield of 2.26% on the current price. Its four-year average dividend yield is 2.27%. The company increased its dividend payouts for 21 consecutive years.

MCD’s revenues from franchised restaurants increased 4.6% year-over-year to $3.71 billion in the third quarter, which ended September 30, 2022. The company’s total operating costs and expenses decreased 3.3% year-over-year to $3.11 billion, while its EPS stood at $2.68.

Analysts expect MCD’s EPS for the fiscal year that ended December 2022 to be $9.95, indicating a 7.3% year-over-year growth, while its revenue is expected to be $23 billion. Additionally, it has topped consensus EPS estimates in three of the trailing four quarters, which is impressive.

MCD’s trailing-12-month EBIT margin of 43.70% is 449.1% higher than the industry average of 7.96%. Its levered FCF margin of 17.77% is significantly higher than the 1.35% industry average.

The stock has gained 5.8% over the past three months to close the last trading session at $269.29.

MCD’s POWR Ratings reflect its 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.

MCD also has an A grade for Quality and B grade for Stability and Sentiment. It is ranked #16 of 46 stocks in the B-rated Restaurants industry.

To access additional ratings for MCD’s Growth, Value, and Momentum, click here.

Nathan’s Famous, Inc. (NATH)

NATH operates in the food service industry as an owner of franchise restaurants under Nathan’s Famous brand name. The company also sells products bearing Nathan’s Famous trademarks through various distribution channels.

On December 14, NATH announced the launch of a new franchise sales initiative aimed specifically at these struggling restaurant owners, offering to cost-effectively convert their location into a Nathan’s Famous.

The conversion program is expected to offer flexibility across restaurant design, equipment, and infrastructure, often using the restaurant’s current arrangement to save costs and open quickly. Potential franchisees can also take advantage of additional revenue opportunities through its ghost kitchen brands, Arthur Treacher’s and Wings of New York.

The company pays a $1.80 dividend annually, which translates to a yield of 2.51% at the current price, and has a 4-year average dividend yield of 2.3%. Its dividend payments have grown at a CAGR of 11.5% over the past three years. Also, it has paid dividends for four consecutive years.

NATH’s total revenues increased 14% year-over-year to $37.50 million in the fiscal second quarter ended September 25, 2022. Adjusted EBITDA and income from operations increased 32.8% and 33.3% year-over-year to $10.32 million and $9.91 million, respectively. Also, its net income and income per share came in at $5.96 million and $1.46, increasing 68.1% and 69.8% year-over-year, respectively.

The stock’s trailing-12-month EBIT margin of 26.13% is 228.3% higher than the industry average of 7.96%. Its levered FCF margin of 11.04% is 720.2% higher than the 1.35% industry average.

The stock has gained 47.4% over the past nine months to close the last trading session at $71.55.

NATH’s robust prospect is reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.

NATH has an A grade for Quality and B grade for Sentiment and Stability. It is ranked first in the same industry.

Click here to see the additional POWR Ratings for NATH (Growth, Value, and Momentum).

Rave Restaurant Group, Inc. (RAVE)

RAVE operates and franchises pizza buffets, delivery/carry-out, and express restaurants under the Pizza Inn trademark worldwide. It operates through three segments: Pizza Inn Franchising; Pie Five Franchising; and Company-Owned Restaurants.

For the fiscal first quarter ended September 25, 2022, RAVE’s revenues increased 17.7% year-over-year to $3.01 million. The company’s net income increased 7.7% year-over-year to $307 thousand. Its adjusted EBITDA increased 25.8% year-over-year to $542 thousand. Additionally, its EPS came in at $0.02.

RAVE’s trailing-12-month net income margin of 72.18% is significantly higher than the industry average of 5.18%, and its levered FCF margin of 21.45% compares with the 1.35% industry average.

The stock has gained 73.5% over the past year to close the last trading session at $1.70.

RAVE has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

RAVE has an A grade for Quality and a B for Value and Sentiment. Within the same industry, it is ranked #3.

Beyond the grades above, we have also given RAVE grades for Growth, Momentum, and Stability. Get all RAVE ratings here.

Stock to Avoid:

Dutch Bros Inc. (BROS)

BROS operates and franchises drive-thru shops. It offers Dutch Bros hot and cold espresso-based beverages and cold brew coffee products, as well as Blue Rebel energy drinks, tea, lemonade, smoothies, and other beverages through company-operated shops and online channels.        

BROS’s loss from operations amounted to $6.38 million for the nine months ended September 30, 2022. Net loss for the same period amounted to $16.44 million or $0.08 per share.

Analysts expect BROS’s EPS to decline 51.5% year-over-year to $0.15 for the fiscal year that ended December 2022. Additionally, BROS has failed to surpass the consensus revenue estimates in three of the trailing four quarters.

Its trailing-12-month gross profit margin of 23.52% is 33.9% lower than the industry average of 35.58%, while its EBITDA margin of 3.47% is 68.7% lower than the 11.09% industry average.

The stock has declined 32.8% over the past nine months to close its last trading session at $34.42.

BROS’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system.

The stock is graded D in Stability, Value, and Quality. It is ranked #43 in the same industry.

In addition to the POWR Rating grades we’ve stated above, BROS’s rating for Sentiment, Momentum, and Growth can be seen here.

MCD shares were unchanged in premarket trading Tuesday. Year-to-date, MCD has gained 2.19%, versus a 4.76% 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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