Consumers are going to restaurants more than ever, though high gas prices may impact future growth, analysts say.
Glen M. Petraglia
OUTLOOK: Overall, our outlook for the restaurant industry is generally favorable. We expect the restaurant industry in the U.S. to sustain growth ranging from 4 percent to 5 percent per year at least for the next ten years. Our base case growth of 4 percent should be driven by population growth and inflation between 1 percent and 3 percent per year respectively.
The wealth of the Baby Boomer generation and the growing clout of Generation “Y” could drive the upside. Another positive factor is the trend toward the increased prevalence of eating out.
In the past 20 years, 40 percent of household spending on food is allocated to eating out. This makes the restaurant sector more of a staple.
Of the large hamburger operators, McDonald’s is best positioned due to the recent prevalence of chicken and salad on the menu. This has the potential to yield share gains for McDonald’s in the coming years. Strong brand recognition, solid domestic market operations and the opportunity to expand internationally will enhance market share gains in the sector.
BUYS: McDonald’s (MCD);* Wendy’s International (WEN)**
Why McDonald’s: McDonald’s is one of only two buy-rated stocks. We look at McDonald’s relative to the packaged food sector, since the company is a very mature restaurant with relatively slower unit growth than some younger concepts.
Over the next three years, we believe McDonald’s will grow earnings at a faster rate than the packaged food sector while also experiencing increasing returns on invested capital (ROIC). This should drive the multiple higher over time. McDonald’s current menu and plans to test more chicken offerings have the potential to sustain momentum in U.S. sales trends and lead to market share gains. This is especially true as consumers become increasingly health conscious.
We see McDonald’s as having a compelling valuation vs. packaged stock foods due to its mature status — McDonald’s is trading at a relative P/E of 0.85 times to packaged food stocks vs. a historical 0.95 times. We think the gap should narrow due to our expectations for higher EPS growth, improving ROIC and expanding margins.
Our analysis of fast food menus shows McDonald’s menu is relatively healthier than the other “Big Three” hamburger operators. This gives McDonald’s the opportunity to grow market share as consumer tastes evolve.
McDonald’s is also reducing its restaurant ownership profile in Europe and other markets via franchising and a shift to a developmental licensee structure. Over time, this should also contribute to improved margins at company-owned restaurants as well as earnings and returns in Europe and elsewhere.
*Citigroup Global Markets has a significant financial interest in McDonald’s Corp.
**Citigroup Global Markets or its affiliates hold a long position in a class of common equity securities of Wendy’s International.
CL King & Associates
Outlook: One of the key issues that the industry has to contend with at this point is the high price of gasoline. This squeeze on disposable income brings pressure particularly at the low end of casual dining. When gas prices spike up, what we see in the industry is a trade down from casual dining to quick-service restaurants, or QSRs.
We have also seen trading down within quick-service restaurants, especially with a lot of the quick-service restaurants now beginning to refocus on the dollar menus. For instance, Burger King has begun advertising the dollar menu, and McDonald’s has moved several of its chicken sandwiches over to the dollar menu. So we are seeing a renewed focus on value.
Outperforms: AFC Enterprises (AFCE); Benihana (BNHN, BNHNA); Denny’s (DENN); Landry’s Restaurants (LNY)
Top pick: Benihana
Why Benihana: First, the stock has a very attractive valuation. Secondly, we’re seeing same-store sales growth and positive traffic that is significantly outperforming the industry.