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3 Top Restaurant Stocks to Buy in May

Leo Sun, Jamal Carnette, CFA, and Demitrios Kalogeropoulos, The Motley Fool

The U.S. restaurant sector posted four straight quarters of same-store-sales growth through the first quarter of 2018, according to industry analytics group TDn2K. That hasn't happened since 2015, and it indicates that the right restaurant stocks could still have room to run.

Today, a trio of our Motley Fool contributors will highlight three restaurant stocks that deserve your attention -- Yum China (NYSE: YUMC), Wingstop (NASDAQ: WING), and McDonald's (NYSE: MCD).

A group of friends clink their drinks together over a big meal.

Image source: Getty Images.

Yum's Chinese counterpart

Leo Sun (Yum China): Yum! Brands (NYSE: YUM) spun off its Chinese unit as Yum China in 2016. Yum China was initially considered a riskier play than Yum Brands, because of its decelerating growth in China and food safety issues. Concerns about China's slowing economy and trade tensions with the U.S. exacerbated the pain.

However, Yum China continued to aggressively expand across China with franchised stores, and it posted impressive growth in recent quarters. Its total comparable store sales rose 4% last quarter, as KFC and Pizza Hut's comps rose 5% and 1%, respectively. Analysts had expected total comps to rise just 2%.

Yum China's restaurant margin also improved 60 basis points annually to 18.5%, which was impressive since it faced higher poultry costs and wages. It opened 237 restaurants during the quarter to hit a total store count of 8,653 -- which was still well below its long-term goal of 20,000 stores.

Yum China is also renovating its existing locations, installing KFC and Pizza Hut stores in gas stations, and testing out a new standalone coffee store, Coffii & Joy, to profit from the growth of China's coffee market.

Yum China didn't provide any exact guidance for the full year, but analysts expect its revenue and earnings to rise 7% and 13%, respectively. The stock isn't necessarily a bargain at 24 times forward earnings, but it could be a long-term winner if its aggressive expansion and renovation plans pay off.

No longer piping hot, but still just as tasty

Jamal Carnette, CFA (Wingstop): After significantly outperforming the S&P last year with an 81% return, Wingstop has taken a breather this year and increased only 17% year to date. The biggest reason for the stock deceleration was a fourth-quarter earnings report in which the restaurant missed on top- and bottom-line analyst estimates.

Despite the earnings miss, the company is still growing rapidly. Full-year revenue increased 15% over the prior year. Same-store-sales growth -- a key metric in the restaurant industry that compares sales growth in restaurants open for at least one year -- increased 6.5%, versus 2.6% in fiscal 2017, pointing to more demand as brand awareness increases.

The company reports first-quarter earnings on May 7. I'll be paying close attention to cost of sales in company-owned stores. To date, the company has done an admirable job holding down these costs, but many restaurants have mentioned increasing labor costs as a headwind to earnings.

That said, labor pressures are a short-term issue, and Wingstop, with only a $2.25 billion market cap, is a company with a long runway for growth. Long-term growth investors should pay close attention to the company.

A bowl of chicken wings with celery and carrot sticks in the background.

Image source: Getty Images.

Stick with the winners

Demitri Kalogeropoulos (McDonald's): If you've been waiting for signs of better operating trends from McDonald's before buying the stock, this might be your chance. The fast-food leader in late April revealed that comparable-store sales growth sped up to a 5.4% rate from 4% in each of the past three quarters. The arguably better news for investors is that the gains were powered by an acceleration in the U.S. market, which has been pressuring results for the better part of a year because of weakening customer traffic trends and spiking competition.

McDonald's executed around those challenges in the fiscal first quarter, as sales gains in the U.S. more than doubled to over 4%. Profitability continued climbing into an industry-thumping mid-40% range, meanwhile, thanks to efficiency gains from its refranchising initiative.

Most of the earnings benefit from that refranchising move has already made its way onto the books, now that nearly 95% of the company's restaurants are franchised, up from 85% in 2015. However, these latest results point to more sales-growth-powered gains to come as the U.S. segment catches up with international divisions that have been growing at around 6% in recent quarters. Further successes like what McDonald's achieved in Q1 could allow for faster growth in 2019 than last year's 4.5% uptick.

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Demitrios Kalogeropoulos owns shares of McDonald's. Jamal Carnette, CFA has no position in any of the stocks mentioned. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.