What a difference a year makes. This time last summer, everything was closed or barely open, people had become frightened to do normal summer activities so there was little travel, especially via the airlines, and overall, it was miserable. While there are some of the COVID-19 issues with the Delta variant, much of the country is vaccinated now. While Los Angeles County has reinstated mask mandates, for the most part those are rare.
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While many companies are facing some very tepid comparisons from last summer, one group is expected to post some outstanding results. The analysts at Baird remain very positive on the restaurant segment, especially with dine-in and carry out service available everywhere, The new Baird research report sized up the industry in front of earnings:

We expect most companies to show upside to calendar-second quarter comps/EPS estimates and to signal a solid start to July. We are staying selective with our Outperform ratings partly due to some risks that could lead to a less robust fundamental picture exiting 2021 and entering 2022. That said, the short-term setup seems generally more positive, including for selected, Neutral-rated casual dining names that have pulled back in recent months.

Here we focus on the six stocks that the Baird analysts have rated at Outperform. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Chipotle Mexican Grill

The remains a favorite destination for those looking to eat out, and the stock is a top pick across Wall Street. Chipotle Mexican Grill Inc. (NYSE: 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 peers. The company has established a strong foundation with a focus on operations, supply chain and marketing over the past two years. The digital transformation brought about by the pandemic allows Chipotle to leverage its digital ecosystem, the strong mobile app, a rapidly growing loyalty program with over 20 million members in just two years, and third-party delivery and digital drive-thrus continue to drive top-line growth and improving margins.

The company posted incredible results that beat Wall Street’s forecasts for both the top and bottom lines. Sales at restaurants open at least a year grew more than 31%, also coming in ahead of expectations. Many analysts raised their price targets on the stock.

Baird’s price target for the shares is $1,750, while the Wall Street consensus target is $1,769.92. However, Thursday’s closing price for Chipotle Mexican Grill stock was $1,798.40 a share.

The return to sit-down dining in restaurant locations has been huge for this industry leader. Darden Restaurants Inc. (NYSE: DRI) owns and operates full-service restaurants in the United States and Canada.
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As of May 31, 2020, the company owned and operated approximately 1,804 restaurants, which included 868 under the Olive Garden, 522 under the LongHorn Steakhouse, 165 under the Cheddar’s Scratch Kitchen, 81 under the Yard House, 60 under the Capital Grille, 44 under the Seasons 52, 41 under the Bahama Breeze and 23 under the Eddie V’s Prime Seafood brands.

In another good sign for shareholders, Darden in late March declared a quarterly disbursement of $0.88 a share, up from $0.37.

Shareholders now receive a 1.83% dividend. Baird has a $160 price target, slightly lower than the $161.02 consensus target. Darden Restaurants stock closed at $144.20 a share on Thursday.

Domino’s Pizza

This stock has been on fire, so investors need to be careful when looking for an entry point. Domino’s Pizza Inc. (NYSE: DPZ) is the number one pizza delivery company in the world, with roughly 13,000 stores in 50 states and more than 70 countries. The company’s system is more than 97% franchised, and 59% of the stores are located internationally.

Domino’s has benefited from a steadily growing online/digital ordering mix that currently represents over 50% of domestic orders and has a long runway for growth. Since 2008, more than 80% of the menu offerings are new or significantly revised.

Top Wall Street analysts have cited sustainable drivers that include the company’s strong, consistent price-value relationship; improving franchise unit economics, due, in part, to the proven strategy of “fortressing” markets; and growing scale and digital sophistication.

The pizza giant also posted huge top and bottom line beats this week, but Baird still feels there is solid upside potential. Same-store sales rose 3.5% in the United States and 13.9% internationally. Also in the second quarter, cumulative two-year same-store sales were up 19.6% domestically and 15.2% internationally. Domino’s also approved a $1 billion share repurchase program.

Baird raised its $510 price target to $560. The consensus target is only $453.28. Domino’s Pizza stock rose almost 15% on Thursday to close at $538.42.

McDonald’s

The fast-food giant continues to revamp both stores and the menu, and it is a solid pick for more conservative investors. McDonald’s Corp. (NYSE: MCD) is the world’s leading global food-service retailer with over 39,000 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 businesspersons.

The company has built a product pipeline, including a new chicken sandwich, a McPlant line and follow-on celebrity promos. Baird feels the key driver of the McDonald’s story will shift to a technology scale that competitors will struggle to replicate. This tech evolution is supporting a wave of consolidation, while it creates pressure on small and mid-tier players.
In addition, many on Wall Street believe that McDonald’s will benefit broadly from economic reopenings in 2021, and the company’s investments in technology, a renewed marketing strategy, loyalty and menu innovation will drive share gains in the industry.

Holders of McDonald’s stock receive a 2.20% dividend. Baird has set a $252 price target, but the consensus target is higher at $258.34. The shares closed on Thursday at $238.67 apiece.
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Wingstop

This stock has huge upside potential, and with the NFL season right around the corner, you can bet the orders will skyrocket. Wingstop Inc. (NASDAQ: WING) operates and franchises more than 1,500 locations worldwide.

The company is dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings and tenders, always cooked to order and hand-sauced-and-tossed in fans’ choice of 11 bold, distinctive flavors. Wingstop’s menu also features signature sides including fresh-cut, seasoned fries and freshly made ranch and bleu cheese dips.

Top analysts feel that Wingstop is still in the early innings of a long-term growth story, as the company has a strong, digitally-focused foundation to support unit growth. Wingstop is 98% franchised, with some of the best unit-level economics in the industry lending support to franchisee demand.

Baird has a $185 price target. The consensus target is $170.47, and Thursday’s closing print of $167.82 was up over 5% for the day.

Yum! Brands

Everybody around the globe has to eat, and this top company continues to expand its worldwide presence. Yum! Brands Inc. (NYSE: YUM), whose brands include KFC, Pizza Hut and Taco Bell, is one of the largest restaurant operators in the world with about 44,000 stores in more than 120 countries. A significant portion of operating profits is derived internationally, with a growing contribution from emerging markets, including a heavy presence in China.

Just this week the company announced it is acquiring Habit Restaurants for $375 million in cash, or $14 a share. Top analysts view the move as a modest positive for the company, but the relatively small acquisition size will limit the stock relevance. The deal represents another move in the restaurant asset land grab taking place as companies seek to build scale.

Investors receive a 1.71% dividend. The Baird target price sits at $130. The consensus target of $120.90 compares with Thursday’s final trade at $120.26 a share.

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The bottom line for investors is that not only are all of these top stocks expected to post some stellar numbers, which some already have, but they also are defensive in nature and, at the margin, make sense for growth investors worried about the potential for a steep market sell-off starting in the late summer or early fall.

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