While the macro headwinds have been marring the optimal performance of the restaurant industry, its long-term prospects look impressive.

Restaurants are significantly investing in automation to use self-service kiosks to reduce employee workload while improving phone orders and the drive-thru experience using AI-powered voice technologies. This is expected to reduce expenses and broaden the profit margins.

Furthermore, the development of e-commerce/online platforms, on-the-go food services, packaging advances, an increasing percentage of working women, increased disposable incomes, and enhanced distribution strategies are fueling the industry’s growth.

According to IMARC Group, the online food delivery market is expected to grow at a CAGR of 10% between 2023 and 2028. Moreover, Paul Westra, managing director of restaurant investment research at Capital One, said, “I think restaurants will succeed in clawing back the vast majority of their lost profits from the last 18 months.”

Given the backdrop, investors could consider adding quality restaurant stocks McDonald’s Corporation (MCD), Yum! Brands, Inc. (YUM) and Rave Restaurant Group, Inc. (RAVE) to their portfolios now.

McDonald’s Corporation (MCD)

MCD operates and franchises its restaurants in the United States and internationally. The company’s segments include the United States (U.S.); International Operated Markets (IOM); and International Developmental Licensed Markets & Corporate (IDL).

On December 15, 2022, MCD and all five members of the restaurant chain’s North American Logistics Council (NALC) signed agreements with Enel North America to purchase renewable energy and the associated renewable energy certificates (RECs) from Enel Green Power’s Blue Jay solar project. This should help MCD achieve its sustainability goals.

MCD’s trailing-12-month gross profit margin of 56.13% is 57.8% higher than the industry average of 35.58%, while its trailing-12-month EBITDA margin of 51.82% is 366.4% higher than the industry average of 11.11%.

MCD’s revenues from franchised restaurants increased 4.6% from the year-ago value to $3.67 billion for the third quarter that ended September 30, 2022. The company’s non-GAAP net income increased 5.3% year-over-year to $5.58 billion, and its non-GAAP EPS stood at $7.51, up 6.5% year-over-year.

Street expects MCD’s revenue to increase 3.5% year-over-year to $23.8 billion in 2023. Its EPS is expected to increase 6.3% year-over-year to $10.60. It surpassed EPS estimates in three out of the four trailing quarters. Over the past nine months, the stock has gained 10.3% to close the last trading session at $272.46.

MCD’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

MCD has an A grade for Quality and a B for Stability and Sentiment. Within the B-rated Restaurants industry, it is ranked #15 out of 45 stocks. Beyond what is stated above, we’ve also rated MCD for Momentum, Growth, and Value. Get all the MCD ratings here.

Yum! Brands, Inc. (YUM)

YUM, with its subsidiaries, develops, operates, and franchises quick-service restaurants worldwide. It operates through four segments: the KFC Division; the Taco Bell Division; the Pizza Hut Division; and the Habit Burger Grill Division.

On November 2, 2022, David Gibbs, CEO, said, “Our three global brands delivered widespread system sales growth, once again demonstrating that our globally diversified business, led by our world-class teams and franchisees, can thrive in any environment.”

YUM’s trailing-12-month gross profit margin of 48.19% is 35.5% higher than the industry average of 35.58%, while its trailing-12-month EBITDA margin of 33.4% is 200.6% higher than the industry average of 11.11%.

YUM’s total revenue came in at $1.64 billion for the fiscal 2023 third quarter that ended September 30, 2022, up 2.1% year-over-year. Its operating profit came in at $546 million, up 3.6% year-over-year, while its franchise and property revenues came in at $760 million, up 6.1% year-over-year.

YUM’s revenue is expected to increase 6% year-over-year to $7.15 billion in 2023, while its EPS is expected to increase 15.9% year-over-year to $5.17. The stock has gained 12.5% over three months to close the last trading session at $128.13.

It’s no surprise that YUM has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Quality and a B for Sentiment. It is ranked #17 in the same industry.

Beyond what is stated above, we’ve also rated YUM for Growth, Value, Momentum, and Stability. Get all YUM ratings here.

Rave Restaurant Group, Inc. (RAVE)

RAVE and its subsidiaries operate and franchise pizza buffets, delivery/carry-out (Delco), and express restaurants under the Pizza Inn trademark in the United States and internationally. It operates through three segments: Pizza Inn Franchising; Pie Five Franchising; and Company-Owned Restaurants.

RAVE’s trailing-12-month P/E of 3.70x is 75.5% lower than the industry average of 15.07x. Its trailing-12-month EV/EBIT of 12.04x is 12.2% lower than the industry average of 13.71x.

RAVE’s trailing-12-month gross profit margin of 68.58% is 92.8% higher than the industry average of 35.58%, while its trailing-12-month EBITDA margin of 18.08% is 62.8% higher than the industry average of 11.11%.

RAVE’s revenues came in at $3 million for the quarter ended September 25, 2022, up 17.7% year-over-year. Its net income increased 7.7% year-over-year to $307,000. Moreover, its adjusted EBITDA came in at $542,000, representing an increase of 25.8%.

Analysts expect RAVE’s EPS to rise 10% per annum for the next five years. Over the past year, the stock has gained 76.8% to close the last trading session at $1.68.

RAVE’s overall A rating equates to a Strong Buy in our POWR Ratings system. It has an A grade for Quality and a B for Value and Sentiment. The stock is ranked #4 in the same industry. We’ve also rated RAVE for Momentum, Stability, and Growth. Get all the RAVE ratings here.

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MCD shares were trading at $271.09 per share on Monday afternoon, down $1.37 (-0.50%). Year-to-date, MCD has gained 2.87%, versus a 5.05% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions. More...

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