The restaurant industry is anticipated to undergo significant shifts this year. Consumers are increasingly emphasizing value over quality and experiential dining. A considerable increase in fast-casual preferences is also growing, fueled by easy mobile ordering and takeaway.
This pattern, far from being a pandemic-driven anomaly, represents a long-term shift in consumer behavior. Given the changing face of the industry, it could be prudent to add McDonald's Corporation (MCD), Potbelly Corporation (PBPB), and Nathan's Famous, Inc. (NATH) to your portfolio this year. Let's understand this in more detail.
Recent months have seen a consistent uptick in restaurant sales. In November 2023, eating and drinking establishments recorded a total seasonally adjusted sales volume of $94.7 billion, reflecting a robust 1.6% increase from October's revised figure of $93.2 billion, marking the ninth consecutive month of sales growth.
Looking forward, technology is expected to revolutionize front-of-house operations across all restaurants. A substantial 73% of diners acknowledge that technology enhances their experience. The year will witness increased adoption of digital menus and ordering systems, often integrated with customer-facing tablets or mobile apps.
These advancements offer a more interactive and engaging menu browsing experience, streamlining the ordering process, particularly in understaffed restaurants, consequently reducing wait times and minimizing human errors. The integration would elevate customer satisfaction, operational efficiency, and overall success within the restaurant industry.
Moreover, last year, voice AI dominated drive-thru lanes, but 2024 heralds the era of drive-thru personalization technology. Various vendors have introduced software utilizing license plate recognition and geofencing to identify customers, enabling precise timing of their arrival in the drive-thru lane. This would aid in the industry’s development.
Furthermore, the prevalence of takeout and delivery, ingrained during the pandemic, fortifies the industry's growth. Despite the resurgence of in-house dining, the convenience and appeal of these services, embraced by 26% of American households weekly in 2023, prompt ongoing restaurant innovations, fostering sustained industry expansion.
Considering this encouraging outlook, let’s look at the fundamentals of the three Restaurants stocks, starting with the third choice.
Stock #3: McDonald's Corporation (MCD)
MCD operates and franchises McDonald's restaurants. The company's restaurants offer a variety of locally suitable food and beverages. Its eateries are owned and operated by local entrepreneurs. Its segments include the United States; International Operated Markets; and International Developmental Licenced Markets & Corporate.
On December 6, MCD and Google unveiled a transformative, multi-year global partnership, aiming to seamlessly integrate Google Cloud technology into thousands of MCD restaurants globally. The alliance marks a pivotal stride for MCD in elevating its restaurant technology platform and positioning itself at the forefront of industry innovation.
On November 20, MCD and global investment firm The Carlyle Group Inc. (CG) disclosed MCD's acquisition of CG's minority ownership stake in the strategic partnership overseeing MCD's operations in mainland China, Hong Kong, and Macau.
With China emerging as MCD's second-largest market, boasting over 5,500 restaurants since 2017, the timing for streamlining its structure is deemed opportune. Recognizing the immense potential to capitalize on heightened demand in this rapidly expanding market, the company aims to fortify its position and maximize long-term benefits.
For the fiscal 2023 third quarter that ended September 2023, MCD’s total revenues increased 14% year-over-year to $6.69 billion. Its operating income grew 16.1% from the year-ago value to $3.21 billion. In addition, the company’s net income and EPS rose 16.9% and 18.3% from the prior year’s period to $2.32 billion and $3.17, respectively.
Analysts expect MCD’s revenue to increase 10.1% year-over-year to $25.53 billion for the fiscal year that ended December 2023. The company’s EPS for the same year is estimated to rise 17% from the prior year to $11.81. Also, the company topped the consensus revenue and EPS estimates in all four trailing quarters.
Shares of MCD have gained 10.3% over the past year to close the last trading session at $291.74.
MCD’s fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
MCD has an A grade for Sentiment and Quality and a B for Stability. It is ranked #13 out of 55 stocks within the Restaurants industry.
In addition to the POWR Ratings I’ve highlighted, you can see MCD’s Growth, Value, and Momentum ratings here.
Stock #2: Potbelly Corporation (PBPB)
PBPB owns and manages around 425 company-owned stores, while franchisees operate approximately 75 stores in the United States. The company's menu comprises toasty hot sandwiches, distinctive salads, soups, chili, sides, desserts, and other items. It allows consumers to create their own menu items.
On November 15, PBPB confirmed the finalization of a deal poised to amplify its footprint in the greater Seattle-Tacoma region of Washington state. The pact, in collaboration with Sound Sandwich LLC, a seasoned local franchisee, will elevate PBPB’s total number of shops in the area to 22.
The strategic move underscores the company's commitment to expansive market presence and strategic partnerships as integral components of its overarching growth trajectory.
On October 30, PBPB finalized a substantial 40-unit agreement with Royal Restaurant Group, a renowned national franchise entity with a proven track record in operating establishments for global brands. The strategic pact encompasses the prospective establishment of 36 PBPB shops spanning key markets in Ohio and Florida.
Leveraging the expertise of the Royal Restaurant Group team, which is well-versed in the development and operation of franchise locations for prominent restaurant brands, PBPB stands to gain invaluable support in achieving its long-term goals.
For the fiscal 2023 third quarter that ended September 24, 2023, PBPB’s total revenues increased 2.7% year-over-year to $120.77 million. Its adjusted EBITDA rose 55.7% from the year-ago value to $7.28 million.
Additionally, adjusted net income and adjusted net income attributable to PBPB per share grew 298.5% and 300% from the prior year’s period to $1.08 million and $0.04, respectively.
Analysts expect PBPB’s revenue to increase 8.3% year-over-year to $489.34 million for the fiscal year that ended December 2023. The company’s EPS for the same period is expected to come in at $0.15. The stock has gained 91.1% over the past year, closing the last trading session at $10.49.
PBPB’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
PBPB has a B grade for Sentiment. It is ranked #11 out of 55 stocks within the same industry.
Click here to access additional PBPB ratings for Growth, Value, Momentum, Stability, and Quality.
Stock #1: Nathan's Famous, Inc. (NATH)
NATH is a licensor, wholesaler, and retailer of Nathans brand products, notably Nathans Beef Hot Dogs. The company's segments include Branded Product Program; Product licensing; and Restaurant operations. Its products are available in approximately 79,000 locations,
In the fiscal second-quarter release, NATH declared a quarterly dividend of $0.50 per share, payable on December 1, 2023, to shareholders recorded as of November 20, 2023. NATH pays a $2.00 per share dividend annually, which translates to a 2.65% yield on the current price level. Its dividend has grown at a 21.7% CAGR over the past five years.
During the fiscal second quarter that ended September 24, 2023, NATH’s total revenues increased 3.3% year-over-year to $38.74 million. Its income from operations came in at $9.10 million. Moreover, the company’s net income and income per share stood at $5.71 million and $1.40 for the quarter, respectively.
As of September 24, 2023, NATH’s cash and cash equivalents came in at $36.98 million, up from $29.86 million as of March 26, 2023. Shares of NATH have gained 10.7% over the past month, closing the last trading session at $75.41.
NATH’s sound prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
NATH has an A grade for Quality and a B for Sentiment. It has ranked #3 in the 55-stock Restaurants industry.
Click here to access the additional NATH ratings (Growth, Value, Momentum, and Stability).
What To Do Next?
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MCD shares were trading at $287.78 per share on Friday morning, down $3.96 (-1.36%). Year-to-date, MCD has declined -2.94%, versus a -1.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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