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3 Reliable Restaurant Stocks to Buy for Reopening Returns

On May 18, President Trump met with several leaders and executives from the restaurant industry. By now, we’re all familiar with how a wide range of businesses have suffered as a result of the Covid-19 outbreak and ensuing lockdown. And so, in the recent meeting with President Trump, restaurant executives have asked for more federal assistance. They highlighted that their sector is a depressed segment of the economy and businesses will need extra capital to stay afloat until customers come back.

Amid the generally grim outlook for many specfiic sectors, the past two months have seen broader market indexes rallying. Now investors are wondering if the market has flown too close to the sun.

In the short run, it isn’t easy to predict what the market or any given stock mighty do. But if you are a long-term investor with a 2 to 3 year time horizon, then I believe the market offers plenty of opportunities.

As part of our economy opens up, here are three restaurant stocks that may be able to bring healthy returns for shareholders:

  • Denny’s (NASDAQ:DENN)
  • McDonald’s (NYSE:MCD)
  • Starbucks (NASDAQ:SBUX)

On May 18, all three of these stocks saw strong bounces alongside the rest of the market. The next day, there was some profit-taking in all three names, potentially offering better entry points for long-term investors. I expect daily volatility to continue in the short run.

All three companies have recently reported earnings that showed some rough fundamental metrics. And there may still be some choppy waters ahead.

Moreover, these restaurant chains will have to follow different state or even national rules depending on the state or country where a restaurant is located. But they are all large and organized enough to be able to adapt to different operating procedures rather efficiently.

Denny’s (DENN)

The restaurant chain bills itself as “America’s Diner” and many of its regular patrons would likely agree. As of late March, the group had a combined 1,695 franchised, licensed and company restaurants. 147 of those are outside of the continental U.S.

On May 14, DENN released results for its first quarter ended March 25, 2020, and provided a business update on the impact of the COVID-19 pandemic on operations. Adjusted earnings per share (EPS) of 17 cents was better than analysts’ estimates, and despite the 36% YoY quarterly fall in revenue, the restaurant managed to post profits of $9 million. CEO John Miller said:

“As restaurant operations were being limited to off-premise sales channels, we implemented streamlined menus, ‘Dine-Thru’ curbside service programs, and shareable family meal packs in a matter of days… [w]e have fortified our balance sheet, made disciplined cost savings decisions, and worked aggressively on multiple fronts to secure various forms of financial relief for our franchisees.

Denny’s has also made amendments in 400 stores and begun selling grocery items. Finally, the company has been “bolstering [its] sanitation protocols to transitioning to free contactless delivery and pick up services.” Following the results, the shares popped higher.

Year-to-date (YTD), DENN stock is down over 50%. On March 19, it hit a multi-year low at $4.50. Now it is hovering around $9.5.

Its current trailing P/E of 5.4 and P/S ratio of 1.3 makes the casual-dining restaurant a long-term play for me, especially if the price falls toward $9 or even below.

McDonald’s (MCD)

The group has more than 38,000 restaurants in over 100 countries, though its largest segment is the U.S. And on April 30, McDonald’s reported first quarter 2020 results.

CEO Chris Kempczinski commented that “McDonald’s has seen a lot over our 65 years and I’m confident that the actions we’re taking will enable us to emerge from this crisis in a position of competitive strength. But in Q1, global comparable sales declined 3.4%. Similarly, consolidated revenues decreased 6% (5% in constant currencies).”

Approximately 75% of McDonald’s restaurants remain open globally. Nonetheless earlier in April, management had already withdrawn its 2020 outlook.

Over 90% of McDonald’s restaurants are currently franchised. This gives it a significant competitive edge, as the initial franchise fees and continuous royalties mean high margins. It also collects rent from franchisees, as the company in fact owns most of these properties. Then it leases them out to the franchisees, often at significant markups.  Put another way, the company is in the real estate business as much as food services.

So far in 2020, MCD stock is down 9%. That decline is compared to a 4.8% drop in the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY), which includes MCD as its third-largest holding at 6.55% of the portfolio, behind Amazon (NASDAQ:AMZN) at a whopping 23.9% and Home Depot (NYSE:HD) at 12.9% of the exchange-traded fund’s assets.

In Aug. 2019, MCD stock hit an all-time high of $221.93. The current price of about $179 means a trailing P/E ratio of 23.5 and P/S ratio of 6.6. On a fundamental basis, I’d be more comfortable with lower values in both metrics.

The Golden Arches may not yet be able to go over $200 in the second half of 2020, but if you are a buy-and-hold investor, then you may consider investing in the shares, especially if there is a dip in price toward the $170 level or below.

If you’re looking for passive income, the burger chain’s current dividend yield stands at 2.9%. Sshares are expected to go ex-dividend on May 29. However for now, McDonald’s has paused its share buyback program.

Starbucks (SBUX)

On April 28, the coffee chain released Q2 Fiscal 2020 results that said its quarterly global same-store sales fell 10%. Americas and U.S. comparable store sales declined 3%.

On the other hand in the quarter, China comparable store sales were down 50%. Regular InvestorPlace may remember that novel coronavirus-related concerns had started rather earlier in the year for Starbucks as the virus had begun affecting operations in China.

For the quarter, adjusted earnings per share came at 32 cents. Revenue was $6 billion, a decline of 5% from the prior year due to lost sales related to the viral pandemic.

Management also warned that third-quarter results would take a larger hit from the COVID-19 outbreak, even though sales in China were recovering. In early April, the group had already withdrawn guidance for fiscal 2020.

Starbucks opened 255 net new stores in the quarter, which means a 6% YoY unit growth. At the end of the period, it had 32,050 stores globally, of which 51% and 49% were company-operated and licensed, respectively.

YTD, SBUX stock is down about 13%. In July 2019, SBUX stock hit an all-time high of $99.72. But on March 18, 2020, the shares saw a 52-week low of $50.02. They are currently around $76.

Its trailing P/E ratio is 26.9 and P/S ratio is 3.4. Like McDonald’s, I’d ideally like to see lower values in both metrics. Long-term investors may consider buying dips on SBUX stock, especially if it goes toward $70 or lower.

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