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Nomura Highlights 'Mixed' Comp Trends In U.S. Restaurant Group, Names Yum!, Papa John's As Top Picks

Jayson Derrick

  • Mark Kalinowski of Nomura initiated coverage of U.S. restaurants with a mixed reaction.
  • Kalinowski highlighted chain restaurant same-store sales trends "generally remain solid," but not all segments appear to be generating improvements.
  • Kalinowski named Yum! Brands, Inc. (NYSE: YUM) and Papa John's Int'l, Inc. (NASDAQ: PZZA) as his top picks.
  • The U.S. restaurant sector reported nearly $466 billion in sales during 2014, marking an increase of 3.8 percent year-over-year, according to Mark Kalinowski of Nomura. The analyst also pointed out that limited-service restaurants accounted for 52 percent of total restaurant sales (up 4.1 percent year-over-year), while full-service restaurants represented the remaining sales (up 3.5 percent year-over-year).

    The Restaurant Space

    In an industry-wide report, Kalinowski initiated coverage of the entire restaurant space, noting that chain restaurant same-store sales trends in the United States remain "generally solid" with the quick-service segment leading the way and same-store sales growth 50–60 basis better now than they did during the first half of 2015.

    Related Link: McDonald's Biggest Threat? Chick-fil-A, According To Nomura

    However, Kalinowski added that not all segments are "generating improvements." Specifically, the family-dining segment's U.S. same-store sales appear to have declined sequentially in the third quarter.

    Looking forward, Kalinowski pointed out several key industry trends that investors need to follow: 1) consumers' definition of "healthy eating" will continue to evolve; 2) digital and technology offerings will become a key selling point; 3) only 11 brand that operate in the United States have surpassed the $1 billion sales mark for international sales – an accomplishment that many companies are attempting to achieve, but doing so carries risks.

    Yum Brands: Top Large-Cap Pick

    Kalinowski named Yum Brands as his top restaurant large-cap pick.

    On the domestic front, the long-discussed "what to do with Taco Bell" topic could "achieve resolution" if the company were to spin the unit and separate the brand from the "truly global" brands of KFC and Pizza Hut.

    Internationally, Yum is "largely immune" to China's economic woes, and the analyst sees stabilization and/or recovery in the key market over the next 12 to 18 months. The company is also in a stronger position with new executive hires to strengthen its relationship with the Chinese government and/or conduct a tax-efficient IPO, resulting in the listing of a tracking stock on the Hong Kong Stock Exchange that would track YUM China's performance.

    Shares were initiated with a Buy rating and $106 price target.

    Papa John's: Top Small-, Mid-Cap Pick

    Kalinowski named Papa John's as his top small-/mid-cap restaurant pick.

    According to Kalinowski, Papa John's faces a "significant" sales opportunity through its "digital revolution," which emphasizes digital ordering technologies for pizza delivery. In fact, more than 50 percent of total U.S. sales are derived digitally, and this percentage is expected to grow to at least 75 percent of total U.S. pizza delivery orders.

    Kalinowski added that Papa John's has "barely scratched the surface" of its international potential given its only 1,388 store count outside of the North America, which is showing impressive same-store sales metrics. The analyst even suggested that over time the company could double or even triple its store count.

    Shares were initiated with a Buy rating and $85 price target.

    Image Credit: By Jwhalin (Own work) [Public domain], via Wikimedia Commons

    Latest Ratings for PZZA

    Date Firm Action From To
    Oct 2015 Nomura Initiates Coverage on Buy
    Oct 2015 Nomura Initiates Coverage on Buy
    Aug 2015 Tigress Financial Downgrades Strong Buy Buy

    View More Analyst Ratings for PZZA
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