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Which Restaurant Stock Could be Chipotle (CMG) of 2019?

Rajashree Bhattacharyya

According to TDn2K’s The Restaurant Industry Snapshot, the U.S. restaurant industry has been witnessing strong growth so far this year and the top-line momentum is anticipated to continue in 2019. Comps grew 1.1% in the month of November, marking the sixth consecutive month of positive sales growth.

Per an article by Foodservice, the industry is likely to hit $825 billion in 2018, representing year-over-year growth of 4%. According to Joel Naroff, TDn2K economist and president of Naroff Economic Advisors, the industry is likely to witness sales recovery 2019 as well.

Notably, the industry’s growth is anticipated to be aided by increased consumer spending and restaurateurs’ focus on digital innovation. 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% this year. Casual dining is expected to experience a gain of 3.4% in sales next year, up from this year’s 3.2%. Fine-dining restaurants will also witness a rise of 5.2%, compared with growth of 5% for 2018.

Chipotle Mexican Grill, Inc. CMG has been one of the few restaurant stocks that have been on a steady growth trajectory. Despite having a good share of negative publicity owing to a food-borne illness, Chipotle’s viable business strategy and the appointment of Brian Niccol as the CEO significantly aided its earnings.

The company’s increased focus on food safety and enhancing customer experience, along with various sales-building initiatives, has been driving top-line growth. Notably, robust marketing activities, including a combination of brand-building efforts, as along with transaction-driving promotions and advertising, are resulting in a steady inflow of new customers.

Meanwhile, the company has redesigned and simplified its online ordering site, enabled online payment for catering, online meal customizations and collaborated with several well-known third-party providers for delivery. Till the end of the third quarter, the company progressed with digitizing second make-lines in roughly 7500 restaurants. The digital pick-up shelves are currently available in 350 restaurants, while the company expects all its restaurants to have pick-up shelves by mid-2019.

Backed by these efficient growth strategies, shares of Chipotle have gained 36.5% so far this year, outperforming the industry’s 0.8% rally. For 2019, the consensus estimate pegs earnings at $11.98, suggesting year-over-year growth of 41.4%. Chipotle currently carries a Zacks Rank #3 (Hold).


Will Restaurateurs Gain Further Momentum in 2019?

The primary growth of restaurateurs in 2019 is likely to stem from an increasing influence of digital and delivery sales. With the ever-growing presence of Internet and smartphones, analysts expect 25% of all restaurant sales to be generated from digital ordering and delivery over the next four years, per a report by Forbes.

Also, a tectonic shift has been witnessed in consumer behavior with online shopping being preferred over traditional brick-and-mortar stores. This has persuaded restaurant operators to adapt to the changing tide as evident from Starbucks’ SBUX efforts in digital, card, loyalty and mobile capabilities.

Subsequently, G2 Crowd Learning Hub expects restaurants to increase mobile POS systems and ordering kiosks by at least 30% in 2019. Further, 40% of restaurants are likely to start accepting mobile payments by 2019.

Moreover, the overall economic scenario is conducive for growth of restaurant stocks. U.S. consumer confidence surged to its highest in 18 years in the month of October, per the Conference Board. Consumer confidence index climbed to 137.9 in October from 135.3 in September. Although the index slightly declined to 135.7 in November, consumer confidence is expected to remain strong in the months ahead.

Picking the Right Stocks

With the help of the Zacks Stock Screener, we have zeroed in on four restaurants stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). These stocks with positive earnings estimate revisions have the potential to emulate Chipotle in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Habit Restaurants, Inc. HABT a burger-centric fast casual restaurant company. Earnings estimates for 2019 have increased 150% over the past two months to 10 cents. The restaurant carries a Zacks Rank #1.

Cracker Barrel Old Country Store, Inc. CBRL is engaged in ownership and operation of full-service restaurants with retail stores in the same unit. Over the past two months, earnings estimates for fiscal 2019 has moved up 1.4%. The Zacks Consensus Estimate for current year earnings is pegged at $8.98, reflecting year-over-year growth of 1.2%. The company carries a Zacks Rank #2.

Domino's Pizza, Inc. DPZ carries a Zacks Rank #2. The consensus estimate for 2019 earnings is $9.39, suggesting growth of 11.1% from the year-ago level. Further, estimates have moved upward by 0.1% over the last 60 days.

BJ's Restaurants, Inc. BJRI, a leading full-service restaurant, carries a Zacks Rank #2. Earnings estimates for 2019 have increased 3.9% over the past two months to $2.42.This suggests that earnings per share will improve 3.2% year over year in 2019.

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Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
BJ's Restaurants, Inc. (BJRI) : Free Stock Analysis Report
 
Domino's Pizza Inc (DPZ) : Free Stock Analysis Report
 
The Habit Restaurants, Inc. (HABT) : Free Stock Analysis Report
 
Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
 
Cracker Barrel Old Country Store, Inc. (CBRL) : Free Stock Analysis Report
 
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