3 Red-Hot Restaurant Stocks That Should Continue to Rally

NYSE: MCD | McDonald's Corporation  News, Ratings, and Charts

MCD – The COVID-19 crisis has shifted the restaurant industry’s landscape. The digital platforms and curb-side delivery options adopted during the pandemic are expected to continue being one of the industry’s key strengths after the pandemic. While this transition has already bolstered the growth of established restaurant operators McDonald’s (MCD), Yum! Brands (YUM), and Restaurant Brands International (QSR), the increasing resumption of patrons’ physical visits to restaurants, thanks to a speedy and effective vaccination drive, we think should drive their growth further and sustain their stocks’ continued rally. Read on.

It is undeniable that the COVID-19 pandemic introduced new challenges to restaurants as consumer fears and social distancing mandates brought restaurants to their knees. But the restaurant industry came back swinging, with curb-side delivery and drive-thru facilities that played a big role in saving many. In fact, as mega-restaurant chains continue to invest heavily in digital channels, they should continue generating sales growth.

Furthermore, after being confined at home for almost a year in compliance with lockdown mandates, people are expected to heartily embrace dining out again now that a mass  vaccination drive is in full swing and appears to be effective. Indeed, the global market for full-service restaurants is expected to grow at a 4.7% CAGR over the next six years to hit $1.7 trillion in 2027.

The recovery from the pandemic and the expected economic growth this year have driven a rally in restaurant stocks McDonald’s Corporation (MCD), Yum! Brands, Inc. (YUM), and Restaurant Brands International Inc. (QSR). Given that these companies are supercharging their advertising and digital platforms, we believe they are uniquely positioned to soar further.

McDonald’s Corporation (MCD)

MCD franchises McDonald’s restaurants in the United States and internationally. It is one of the world’s leading food service brands with more than 36,000 restaurants in more than 100 countries. Its widely popular Happy Meals are a hit with its customers with families.

In April, MCD collaborated with 21st century global pop icon BTS. The superstar band’s signature order includes a variety of eats, such as 10-piece Chicken McNuggets, medium fries, medium Coke and for the first time ever in the U.S., sweet chili and Cajun dipping sauces inspired by popular recipes from McDonald’s South Korea. The BTS meal will be available globally in nearly 50 markets and should attract youngsters.

Also in April, MCD implemented new Global Brand Standards, voicing its  commitment to fostering a safe, respectful and inclusive workplace. Its  aim is to create an environment that furthers employees’ physical and psychological safety. The move should make its  employees feel more comfortable, safe and welcomed, which should  ultimately lead to brand loyalty and improved service.

MCD’s revenue increased 8.7% year-over-year to $5.12 billion in the first quarter, ended March 31,  while its operating income grew 34.7% from its  year-ago value to $2.28 billion. The company reported  $1.54 billion in new income, representing a 38.8% increase year-over-year. Its EPS came in at $2.05, as compared to its  $1.47  year-ago value.

A $2.08  consensus EPS estimate for the current quarter, ending June 30, represents a 215.2% improvement year-over-year. The $22.4 billion consensus revenue estimate  for the current year represents a 16.6% increase from the same period last year. The stock has gained 30.8% over the past year.

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

MCD is also rated an A in Quality, and a B in Growth and Stability. Within the B-rated Restaurants industry, it is ranked #4 of 45 stocks.

To see additional POWR Ratings for Momentum, Sentiment and Value for MCD, Click here.

Yum! Brands, Inc. (YUM)

Formerly known as TRICON Global Restaurants, Inc., YUM operates primarily through  the restaurant brands KFC, Pizza Hut and Taco Bell, which are  global leaders in the chicken, pizza and Mexican-style food categories, respectively. The company’s family of brands also includes The Habit Burger Grill, a fast-casual restaurant.

Last month, YUM declared that it plans to decrease its greenhouse gas (GHG) emissions 46% by 2030 in partnership with its franchisees and members throughout the supply chain to create a healthier future for its  customers, communities and the environment. In addition,  the company also pledged to achieve net-zero emissions by 2050.

In March, YUM acquired Tictuk Technologies, a leading Israeli omnichannel ordering and marketing platform company. It has so far successfully deployed Tictuk’s platform in approximately 900 KFC, Pizza Hut and Taco Bell restaurants in 35 countries outside of the United States. This addition to  YUM’s technology portfolio should facilitate the company’s ability to offer more ways for consumers globally to access and order food  by using one of the world’s most popular social media and conversational platforms.

In the first quarter, ended March 31, YUM’s total revenue increased 18.3% year-over-year to $1.49 billion. The company’s operating profit increased 117% to $543 million, while its net income increased 312.5% from its year-ago value to $326 million. Its EPS came in at $1.07, representing a 296.3% increase year-over-year.

Analysts expect YUM’s revenue for the quarter ending June 30, 2021 to be $1.47 billion, representing 23.1% year-over-year growth. The company’s EPS is likely to increase 16.6% for its fiscal year 2021. YUM has gained 41.5% over the past year.

It is no surprise that YUM has an overall B rating, which equates to Buy in our POWR Ratings system. It has an A grade for Quality, and a B grade for Sentiment. Within the B-rated Restaurants industry  it is ranked #10.

In total, we rate YUM on eight different levels. Beyond what we’ve stated above, we have also given YUM grades for Momentum, Growth, Value and Stability. Get all the YUM ratings here.

Restaurant Brands International Inc. (QSR)

QSR is one of the world’s largest quick service restaurant companies. It owns three of the world’s most prominent and iconic quick service restaurant brands: Tim Hortons (TH), Burger King (BK), and Popeyes (PLK). The company owned or franchised 4,949 TH restaurants, 18,625 BK restaurants, and 3,451 PLK restaurants in approximately 100 countries worldwide and U.S. territories as of December 31, 2020.

In March, QSR’s Popeyes brand along with Jubilant Foodworks Limited unveiled plans to develop and open hundreds of Popeyes restaurants across India, Bangladesh, Nepal and Bhutan in the coming years. The launch of its iconic Louisiana-style chicken to a new population that already loves bold flavors should help it increase its r sales significantly.

During the first quarter, ended March 31, QSR’s revenue increased 2.4% year-over-year to $1.26 billion, while its adjusted EBITDA grew 9.1% from its  year-ago value to $480 million. The company reported  $270 million in net income, representing a 22.7% increase year-over-year. Its EPS came in at $0.58, compared to its $0.48  year-ago value.

QSR is expected to see 14% revenue growth for 2021 and 7.4% for 2022. Its EPS is estimated to increase 31.5% year-over-year to $2.67 for the current year. Over the past year, QSR’s stock has gained 33.7%

QSR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. It has a B grade for Quality and Stability. Among the 45 stocks in the B-rated Restaurants industry it is ranked #20.

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

MCD shares were trading at $234.03 per share on Tuesday afternoon, down $3.08 (-1.30%). Year-to-date, MCD has gained 9.74%, versus a 11.09% rise in the benchmark S&P 500 index during the same period.

About the Author: Samiksha Agarwal

Samiksha Agarwal has always had a keen interest in financial markets. This has led her to a career as a financial journalist. Through her extensive knowledge of fundamental analysis, her goal is to help investors identify untapped investment opportunities in the stock market. More...

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