While inflation and high prices chewed on consumer wallets, restaurant sales thrived in 2023 after an impressive turnaround last year. In light of this, I have highlighted three fundamentally robust restaurant stocks, Starbucks Corporation (SBUX), Domino’s Pizza Group plc (DPUKY), and Biglari Holdings Inc. (BH), which seem well-positioned to garner significant returns in the long term.
Preliminary data from the U.S. Census Bureau shows that eating and drinking places served up a healthy 1.4% gain in July from June, with total sales reaching $91.1 billion. This marks the third consecutive month of solid growth, following robust gains in May (1.6%) and June (0.8%), with a clear upward trend in the summer months.
As per the National Restaurant Association’s 2023 State of the Restaurant Industry report, the food service industry is expected to reach $997 billion in sales in 2023, with one contributing factor being the upward trend in menu prices owing to inflation.
Moreover, the demand for online food delivery services has experienced a significant boost post-pandemic, allowing consumers to order from various restaurants and cuisines.
The global online food delivery services market is expected to grow from $128.32 billion in 2022 to $143.05 billion in 2023 at a CAGR of 11.5%. Further, the market is expected to reach $159.46 billion in 2027, growing at a CAGR of 2.8%.
In a year, the global food and beverages market witnessed substantial expansion, surging from $6.73 trillion in 2022 to $7.22 trillion in 2023, propelled by a robust CAGR of 7.3%. Forecasts indicate that the food and beverages market will scale to $9.23 trillion by 2027, growing at a CAGR of 6.3%.
As the industry continues to meet consumer tastes and preferences and remains resilient through economic cycles, investing in SBUX, DPUKY, and BH could boost your portfolio returns.
To that end, let us evaluate the aforementioned stocks in detail:
Starbucks Corporation (SBUX)
The renowned specialty coffee retailer SBUX operates through three segments: North America; International; and Channel Development. Its stores offer coffee and tea beverages, roasted whole beans and ground coffees, single-serve products, ready-to-drink beverages, and various quick bites.
On June 21, backed by its strong financials, the company declared a quarterly dividend of $0.53 per share of outstanding common stock, payable in cash to its shareholders on August 25, 2023.
SBUX’s annual dividend of $2.12 yields 2.20% at the current price level, while its four-year average dividend yield is 1.91%. Its dividend payouts have increased at an 8.9% CAGR over the past three years and a 10.9% CAGR over the past five years. Also, it has a record of 12 years of consecutive dividend growth.
In the third quarter (ended July 2, 2023), SBUX’s total net revenues increased 12.5% year-over-year to $9.17 billion. Its non-GAAP operating income rose 15.9% from the year-ago value to $1.59 billion, while its attributable net earnings increased by 25.1% from the same period last year to $1.14 billion.
Also, its non-GAAP earnings per share came in at $1, representing a 19% increase year-over-year.
The consensus revenue estimate of $9.28 billion for the fourth quarter (ending September 2023) represents a 10.3% increase year-over-year. The consensus EPS estimate of $0.97 for the current quarter indicates a 19.9% improvement year-over-year.
The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.
Over the past three years, SBUX’s EBITDA and net income have grown at 24.7% and 41.4% CAGRs, respectively. Moreover, its EPS grew at a 42.8% CAGR over the same period.
SBUX’s trailing-12-month EBITDA and levered FCF margins of 18.58% and 7.78% are 72.5% and 61.6% higher than the 10.77% and 4.81% industry averages, respectively. In addition, the stock’s trailing-12-month net income margin of 10.80% compares to the industry average of 4.19%.
The stock has gained 9.3% over the past year to close the last trading session at $96.57.
SBUX’s POWR Ratings reflect solid prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
SBUX also has a B grade for Momentum, Stability, Sentiment, and Quality. It is ranked #10 out of 43 stocks in the B-rated Restaurants industry. Click here to see the other ratings of SBUX for Growth and Value.
Domino’s Pizza Group plc (DPUKY)
Based in Milton Keynes, the United Kingdom, DPUKY owns, operates, and franchises several Domino’s Pizza outlets. It operates stores in the United Kingdom and the Republic of Ireland and leases its stores.
During the six months that ended June 25, 2023, DPUKY’s revenue increased 19.6% year-over-year to £332.90 million ($424.04 million). Its gross profit rose 20.9% year-over-year to £153.20 million ($195.14 million).
Its profit for the period improved by 90.5% from the year-ago value to £80.20 million ($102.16 million). Also, the company’s EPS stood at 19.2 pence, up 102.1% year-over-year.
Street expects DPUKY’s revenue to increase 15% year-over-year to $822.77 million in the current year (ending December 31, 2023). For the fiscal year 2024, its revenue is anticipated to reach $863.61 million, registering a 5% growth from the prior year.
DPUKY’s revenue and EBITDA have increased at CAGRs of 9% and 5.6% over the past three years, respectively, while its EPS has improved at an impressive CAGR of 146% in the same period.
The stock’s trailing-12-month net income margin of 18.28% is 336.7% higher than the industry average of 4.19%. Likewise, its EBIT and levered FCF margins of 16.34% and 11.13% are 124.6% and 131.2% higher than the industry averages of 7.28% and 4.81%, respectively.
Over the past year, the stock has gained 51.4% to close the last trading session at $10.10.
It’s no surprise that DPUKY has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Stability and a B for Momentum and Quality. Within the same industry, it is ranked #2.
In addition to the POWR Ratings we’ve stated above, we also have DPUKY’s ratings for Growth, Value, and Sentiment. Get all DPUKY ratings here.
Biglari Holdings Inc. (BH)
BH owns, operates, and franchises restaurants in the United States under the names of Steak n Shake and Western Sizzlin. The company also engages in underwriting commercial trucking insurance, selling physical damage and non-trucking liability insurance to truckers, and providing property and casualty insurance.
For the fiscal second quarter that ended June 30, 2023, BH’s revenue increased marginally year-over-year to $93.54 million, while its revenue from restaurant operations grew 7.6% from the year-ago value to $64.49 million. Its EBIT amounted to $2.89 million compared to a year-ago loss of $96.49 million.
The company’s net earnings of $1.88 million and $6.64 per share improved significantly from the prior-year quarter’s net loss of $73.78 million and $244.37 per share.
Over the past three years, BH’s EBITDA and tang book value has grown at 2.5% and 6.5% CAGRs, respectively. Moreover, its levered FCF has increased at a 9.7% CAGR over the same period.
The stock’s trailing-12-month EBIT and levered FCF margins of 12.87% and 7.65% are 76.9% and 58.9% higher than the industry averages of 7.28% and 4.81%, respectively. Likewise, its trailing-12-month net income margin of 29.10% compares to the 4.19% industry average.
BH’s shares have gained 31% over the past year and 29.7% year-to-date to close the last trading session at $179.98.
BH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Momentum, Stability, Sentiment, and Quality. Out of 43 stocks in the same industry, it is ranked first. Click here to view BH’s rating for Growth.
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SBUX shares were trading at $97.06 per share on Friday afternoon, up $0.49 (+0.51%). Year-to-date, SBUX has declined -0.65%, versus a 14.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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