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5 Restaurant Stocks to Stand Out Despite Near-Term Concerns

Zacks Equity Research

Despite showing substantial improvement in sales growth over the last year, the U.S. restaurant industry is still not out of harm’s way. Although sales started recovering from the fourth quarter of 2017, the industry has been bearing the brunt of declining traffic and intense competition.

Nevertheless, every cloud has a silver lining. Increased consumer spending and restaurateurs’ focus on digital innovation is anticipated to drive the industry’s sales growth in 2019.

Issues Plaguing the Restaurant Industry

Per an article by Bloomberg, the restaurant industry is expected to face near-term concerns such as rising food and wage costs which will affect profits. Moreover, recent data shows that there is an oversupply of restaurants in the United States, inducing fierce competition among operators. Rivalry is also rife from other sectors like grocery store prepared foods and convenience stores. The intensifying competition has compelled even Starbucks Corporation SBUX to shut down some U.S. locations due to over-saturation worries.

Persistent erosion in traffic is another pressing concern that is plaguing the restaurant operators. Same-store traffic in chain restaurants have been negative and is expected to continue to decline in the near term. Traffic declined 1.9% in 2018, according to TDn2K’s The Restaurant Industry Snapshot.

Moreover, we can spot a disparity between consumer demand for delivery services and restaurateurs’ high costs in providing the same. This is because delivery revenues are often shared by third parties which decrease the restaurant operator’s margins.

The Silver Lining

Despite facing the above-mentioned headwinds, the space is not totally bereft of positives. It is notable how restaurant giants like Mc Donald’s MCD, Domino’s DPZ and few others are thriving on innovation and large-scale digitization. We believe that such efforts will benefit the industry in the long term.

According to an article by Restaurant Business, the fast-casual restaurant space is likely to record sales growth of 8.3% in 2019 compared with 8% in 2018. Casual dining is anticipated to experience a gain of 3.4% in sales in the current year, up from the previous year’s 3.2%. Fine-dining restaurants will also witness a rise of 5.2%, compared with growth of 5% for 2018.

Picking the Right Stocks

With the help of the Zacks Stock Screener, we have zeroed in on five restaurants stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). These stocks display notable estimated earnings growth in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.

Starbucks carries a Zacks Rank #1. The company has been undertaking digital initiatives to better serve customers. The Zacks Consensus Estimate for current-year earnings is pegged at $2.72, reflecting year-over-year increase of 12.4%.

Darden Restaurants, Inc. DRI, a Zacks Rank #2 company, banks on various sales-bolstering initiatives and cost-saving efforts to drive growth. Earnings for fiscal 2019 are expected to grow 18.3% year over year, per the Zacks Consensus Estimate.

Brinker International, Inc. EAT is investing heavily in technology-driven initiatives, like digital ordering, to boost sales. The consensus estimate calls for current-year earnings of $2.85, reflecting growth of 10% from the year-ago level. Brinker carries a Zacks Rank #2.

Dine Brands Global, Inc. DIN carries a Zacks Rank #2. The company is expected to witness earnings growth of 30.7% in 2019 when compared on a year-over-year basis.

El Pollo Loco Holdings, Inc. LOCO, Zacks Rank #2 company, is a fast-casual Mexican restaurant. Per the Zacks Consensus Estimate, the company’s earnings for 2019 will grow 14.3%.

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