Restaurants increase convenience and give many people a place to unwind. Still, their demand can ebb and flow with the broader economy because consumers can always cook meals at home when times are tough, and the market seems to be baking in a downturn for the industry - over the past six months, it has pulled back by 9.1%. This performance was disheartening since the S&P 500 held steady.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. Keeping that in mind, here is one restaurant stock boasting a durable advantage and two we’re passing on.
Two Restaurant Stocks to Sell:
The Cheesecake Factory (CAKE)
Market Cap: $2.66 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ: CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Are We Cautious About CAKE?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Poor expense management has led to an operating margin of 4.3% that is below the industry average
- High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate
At $53.90 per share, The Cheesecake Factory trades at 13.9x forward P/E. To fully understand why you should be careful with CAKE, check out our full research report (it’s free).
Kura Sushi (KRUS)
Market Cap: $791.5 million
Known for its conveyor belt that transports dishes to diners, Kura Sushi (NASDAQ: KRUS) is a chain of sushi restaurants serving traditional Japanese fare with a touch of modernity and technology.
Why Is KRUS Not Exciting?
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 4.6 percentage points
- Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
- Cash-burning history makes us doubt the long-term viability of its business model
Kura Sushi’s stock price of $64.87 implies a valuation ratio of 1,007.6x forward P/E. If you’re considering KRUS for your portfolio, see our FREE research report to learn more.
One Restaurant Stock to Buy:
Wingstop (WING)
Market Cap: $9.15 billion
The passion project of two chicken wing aficionados in Texas, Wingstop (NASDAQ: WING) is a popular fast-food chain known for its flavorful and crispy chicken wings offered in a variety of sauces and seasonings.
Why Will WING Outperform?
- Customers are lining up to eat at its restaurants as the company’s same-store sales growth averaged 16.9% over the past two years
- Disciplined cost controls and effective management resulted in a strong two-year operating margin of 25.3%
- Strong free cash flow margin of 15% enables it to reinvest or return capital consistently
Wingstop is trading at $326.21 per share, or 82.5x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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