Anticipations of an economic contraction amid macroeconomic headwinds and regional banking failures have hampered investor sentiments. Restaurant stocks, which tend to be great defensive pick-ups during downturns, could be considered now. Against this backdrop, let us look at some restaurant stocks, Nathan’s Famous, Inc. (NATH) and Rave Restaurant Group, Inc. (RAVE) now.

Coupled with the macroeconomic headwinds, the recent financial system tumult had an impact on the whole economy to some extent. Consequently, heightened recessionary fears have dashed investor optimism. The restaurant industry is not out of its ambit.

However, despite being faced with significant challenges such as sky-high inflation, interest rate hikes, supply chain disruptions, and labor shortages, industry professionals are optimistic amid such downturns.

To battle the most significant challenge of labor shortages, some establishments have increased wages to attract labor to meet customer requirements, whereas some have turned to automation to escape from the grasp of mounting wages. For example, some restaurants are using self-ordering kiosks or delivery apps to reduce the need for human workers.

Mark Wasilefsky, head of the restaurant franchise finance group at TD Bank, said, “Our survey found that the majority of restaurant franchise operators plan to invest in store digital and delivery systems, as well as in reimaging and remodeling.”

As per Statista, revenue in the online food delivery market in the United States is projected to reach $231.30 billion in 2023 and grow at a CAGR of 13.6% between 2023 and 2027. Moreover, the restaurants and mobile food services market is expected to reach $3.79 trillion in 2027, growing at a CAGR of 5.8%.

Furthermore, given the current market dynamics and the robust long-term prospect of the industry, fundamentally strong restaurant stocks NATH and RAVE might be solid buys now.

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 February 2, NATH’s board of directors increased the quarterly dividend by 11% and declared a quarterly dividend of $0.50 per share, paid to the shareholders on March 3, 2023.

Over the last three years, NATH’s dividend payouts have grown at a 3.9% CAGR. While NATH’s four-year average dividend yield is 2.30%, its current annual dividend of $2 translates to a 2.65% yield on prevailing prices.

NATH’s revenue has grown at 7.3% and 4.4% CAGRs over the past three and five years, respectively. Moreover, its EBITDA and EBIT have grown at 8.8% and 9.2% CAGRs over the past three years, respectively.

In terms of the trailing-12-month net income margin, NATH’s 14.45% is 217.1% higher than the 4.56% industry average. Its 22.63% trailing-12-month ROTA is 465.6% higher than the industry average of 4%.

NATH’s total revenues increased marginally year-over-year to $26.15 million for the fiscal third quarter that ended December 25, 2022. The company’s net income increased 53.2% from the year-ago period to $3.26 million, and its income per share came in at $0.79, up 51.9% year-over-year. Its adjusted EBITDA came in at $6.90 million, up 16.8% year-over-year for the same quarter.

The stock has gained 38.7% over the past year and 18.8% over the past six months to close the last trading session at $75.18.

NATH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

It has an A grade for Quality and a B for Sentiment. It is ranked second out of the 46 stocks in the A-rated Restaurants industry.

To see the additional ratings of NATH for Growth, Value, Momentum, and Stability, click here.

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.

In terms of the trailing-12-month net income margin, RAVE’s 70.13% is significantly higher than the 4.56% industry average. NATH’s trailing-12-month ROTA of 60.90% is significantly higher than the industry average of 4%.

RAVE’s EBITDA and EBIT have grown at 4.8% and 7.7% CAGRs over the past three years, respectively.

For the fiscal second quarter that ended December 25, 2022, RAVE’s revenues increased 6.3% year-over-year to $2.87 million. The company’s adjusted EBITDA increased 8.8% year-over-year to $615 thousand. Additionally, its net income and income per share came in at $348 thousand and $0.02, respectively.

For the six months that ended December 25, 2022, RAVE’s cash provided by operating activities came in at $792 thousand, compared to $14 thousand for the six months that ended December 26, 2021.

The stock has gained 41.4% over the past year and 2.1% over the past six months to close the last trading session at $1.47.

It is no surprise that RAVE has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.

It has an A grade for Quality and a B for Value and Sentiment. It is ranked #4 within the same industry.

Click here to see additional RAVE grades for Growth, Momentum, and Stability.

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NATH shares were unchanged in premarket trading Tuesday. Year-to-date, NATH has gained 12.57%, versus a 7.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Sristi Suman Jayaswal

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors. More...

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