Services

Jefferies Has 4 Favorite Restaurant Stocks to Buy for 2019

Lee Jackson

Published: December 20, 2018 7:10 am

Last Updated: January 11, 2020 1:27 pm

It’s that time of year again, the time when all the top firms that we cover here at 24/7 Wall St. start to make their prognostications and stock picks for 2019. This not only gives investors a bit of a head start on year-end portfolio reshuffling, but it also gives them a look at what the overall macro thoughts for the coming year are at the big brokerages and banks.

Given the extreme selling we have witnessed, many investors remain nervous and may be reluctant to buy shares now. Because of that volatility, it makes sense to look for safer stocks, and popular restaurants that dominate the competition may be the best way to go.

A new Jefferies report highlights the firm’s top restaurant picks for 2019. Jefferies clearly favors industry favorites that should see little pressure from a slowing economy, and the report noted this:

We think big brands will continue to hold onto recent market share gains, and 2019 could become more of a stock-pickers market for restaurant investors. We think the #1 fundamental driver of stock performance will be (and has been) same-store-sales (SSS), which we believe will need to be accelerating and in positive territory (or turning materially positive in 2019) for a stock to work. We favor companies with clear SSS drivers, and are less focused on bargain-hunting in these later stages of the cycle, as it remains a challenging environment for turnarounds, especially in full-service.

These four top companies are the top picks for 2019 at Jefferies, and all are rated Buy.

Chipotle Mexican Grill

Despite numerous issues over the past few years, the company remains a favorite destination for those looking to eat out. Chipotle Mexican Grill Inc. (NASDAQ: CMG) operates more than 2,400 fast-casual Mexican restaurants offering freshly made burritos, tacos, burrito bowls and salads. It is 100% company operated and runs average unit volumes much higher than its peers.

Earlier this year, the company hired former Taco Bell CEO Brian Niccol, who was tasked with turning around the chain, which has struggled to return to red-hot growth after a sales- and reputation-crushing string of food safety lapses a few years ago.

The company reported solid third-quarter results that exceeded analysts’ expectations, and while it did not give any forward comparison guidance for next year, the company indicated that it would open 140 to 155 new stores in 2019, above the 130 in 2018. Jefferies said this:

Chipotle Mexican Grill is one of the better positioned companies to benefit from the ongoing shift to digital/off-premise with the operations now poised to again handle increased volume & throughput. Operations improvements implemented by Chief Restaurant Officer Scott Boatwright starting to take hold, and restaurant-level margins can return to 20%+ levels sooner-than-expected, driven by more regular pricing, traffic gains and efficiencies at the unit level.

The Jefferies price target for the shares is $550, and Wall Street consensus target is lower at $467.96. The shares ended trading on Wednesday at $427.05, down almost 4% on the day.

Dave and Busters

This top chain continues to be a favorite across Wall Street as millennials and Generation X love to spend time there. Dave & Buster’s Entertainment Inc. (NASDAQ: PLAY) owns and operates entertainment and dining venues for adults and families in North America. Its venues offer a menu of “Fun American New Gourmet” entrées and appetizers, as well as a selection of non-alcoholic and alcoholic beverages and an assortment of entertainment attractions centered on playing games and watching live sports and other televised events.

Many top analysts feel the new unit growth story has an underappreciated, differentiated brand and business model with no real direct competitors. Some expect this to work to the company’s advantage as it moves later in the cycle, which along with continued focus on new, proprietary games/amusements backed by marketing, should drive growth and broad-based brand awareness to support incremental same-store sales and margin leverage on 50% to 60% flow-through.

Jefferies agrees and said this in its coverage of the stock:

Strong new store pipeline with visibility for sustainable 10%+ growth, even with unit productivity declining off recent record outperformance/highs and driving revenue growth below store growth. Competition is a factor but fears are overblown: youngest store cohorts continue to outperform targets and we think operational/strategy improvements and flexible store formats provide a compelling advantage.

Investors receive a 1.31% dividend. Jefferies has a $58 price target, and the consensus target is $62.78. The stock closed at $45.26 on Wednesday.

McDonald’s

The fast-food giant does a ton of business overseas but still remains a solid pick for investors seeking dividends and a degree of safety. McDonald’s Corp. (NYSE: MCD) is the world’s leading global food-service retailer with over 37,000 locations serving approximately 69 million customers in over 100 countries each day. More than 80% of McDonald’s restaurants worldwide are owned and operated by independent local business men and women.

McDonald’s shares have been positive recently as menu price increases and global growth fueled a strong third-quarter earnings report. McDonald’s beat earnings on the top and bottom line, and the company posted its 13th consecutive quarter of positive same-store sales growth.

The analysts noted this in their report:

McDonald’s trades at discount to other highly-franchised peers. Our price target is 16 times 2020 EBITDA, in-line with peers as we recognize durability of cash flows from increased franchise mix. Proprietary work on social media reviews using Merchant Centric data gives us confidence in improving consumer sentiment.

McDonald’s shareholders are paid a nice 2.57% dividend. The $200 Jefferies price target for the stock compares with a consensus price objective last seen at $192.74, as well as the most recent close at $179.16 per share.

Starbucks

The retail giant has traded down some recently and is offering a very solid entry point. Starbucks Corp. (NASDAQ: SBUX) operates as a roaster, marketer and retailer of specialty coffee worldwide. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single-serve and ready-to-drink coffee and tea products, juices and bottled water.

The company also licenses its trademarks through licensed stores, as well as grocery and national foodservice accounts. The company offers its products under the Starbucks, Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange, Ethos, Starbucks VIA, Starbucks Doubleshot, Starbucks Refreshers and Starbucks Discoveries Iced Café Favorites brand names.

The Jefferies team is bullish on the overall opportunities in China and noted this in a recent report:

Our bottoms up analysis of the China business implies it could grow at a 15% compounded annual growth rate to $6.4 billion by fiscal 2024, contributing 20% of EBITDA. While a China spin off is unlikely, our sum-of-the-parts analysis suggests a trading range in the mid-60s to high 80s.

Shareholders of Starbucks are paid a 2.20% dividend. Jefferies has set its price objective at $76, while the posted consensus target is down at $68.48. The stock closed Wednesday’s trading at $64.06 a share.

These are four very well-known and loved brands that offer investors some safety in a volatile market. While restaurants are very data dependent, and a deep recession could hurt traffic at some, they make good sense for investors in 2019 and beyond.