Despite a tough macroeconomic environment, the restaurant industry is expected to witness robust growth this year, driven by consumers’ resilience and willingness to spend on dining experiences. Moreover, the growing adoption of digital technology to cater to the continuously evolving customer preferences provides numerous growth opportunities to the industry.

Hence, it could be wise to invest in fundamentally sound restaurant stocks Papa John’s International, Inc. (PZZA) and Carrols Restaurant Group, Inc. (TAST) for growth. However, investors could hold The Cheesecake Factory Incorporated (CAKE) and wait for a better entry point in this stock.

Before delving deeper into their fundamentals, let’s discuss why the restaurant industry has been thriving.

The resiliency of the U.S. consumer was quite evident in July, as restaurant sales posted a healthy gain. According to preliminary data from the U.S. Census Bureau, eating and drinking places registered total sales of $91.10 billion, up 1.4% from June’s sales volume. Moreover, July represented the third straight month of solid restaurant sales growth.

As per 2023 State of the Restaurant Industry report, the food service industry is expected to reach $997 billion in sales in 2023, primarily driven by higher menu prices.

Digital technology is rapidly revolutionizing the restaurant industry. Incorporating emerging technologies to automate operations helps restaurants lower costs, enhance efficiency, and deliver the freshest and highest quality food. Restaurants can leverage AI or cloud to predict demand and for more effective digital supply chain planning.

Thanks to increasingly sophisticated radio frequency identification (RFID) and Internet of Things (IoT) tracking technologies, restaurants can keep close tabs on their goods in transit. Restaurants can also use analytics to plan and implement smart limited-time offers (LTOs) on menu items, which take advantage of supply and demand shifts identified by internal and third-party data sources.

Further, by adopting the latest technology, restaurants can enhance the overall customer experience with AI-powered voice technology optimizing phone and drive-thru orders, and online food delivery options and self-service kiosks, offering customization, flexibility, and convenience to customers.

According to IMARC, the U.S. online food delivery market is expected to reach $46.50 billion by 2028, growing at a CAGR of 10% during the forecast period (2023-2028). The evolving customer preferences, rising adoption of convenience-driven lifestyles, several technological advancements, and the COVID-19 pandemic-induced demand are key factors driving the market’s growth.

Considering these conducive trends, let’s take a look at the fundamentals of the three Restaurants stocks, starting with number 3.

Stock to Hold:

Stock #3: The Cheesecake Factory Incorporated (CAKE)

CAKE engages in the restaurant business and operates two bakeries that produce cheesecakes and other baked products for its restaurants, international licensees, third-party bakery customers, external food service operators, retailers, and distributors. Also, it operates restaurants in the U.S. and Canada under The Cheesecake Factory, North Italia, and other brands.

During the second quarter of 2023, CAKE opened a Cheesecake Factory and a Henry in the Miami area and a Doughbird in Tucson, AZ. While all the sites in its pipeline remain active, the company continues to experience some delays in opening dates due to construction delays and permit approval delays. As a result, it now expects to open as many as 20 new restaurants in fiscal 2023.

Over the past three years, CAKE’s revenue and EBITDA increased at CAGRs of 15.9% and 45.8%, respectively. However, the company’s tangible book value and total assets declined at 8.7% and 1.2% CAGRs over the same time frame, respectively.

CAKE’s trailing-12-month gross profit margin of 39.72% and 12.1% is higher than the industry average of 35.45%. But the stock’s trailing-12-month EBITDA margin and net income margin of 5.97% and 1.91% are 45.3% and 55.7% lower than the respective industry averages of 10.92% and 4.30%.

For the second quarter that ended July 4, 2023, CAKE’s revenues increased 4% year-over-year to $866.17 million. Its income from operations was $47.47 million, up 69.9% year-over-year. The company’s adjusted net income and adjusted net income per share grew 63.2% and 18.7% from the prior year’s quarter to $43.14 million and $0.88, respectively.

Analysts expect CAKE’s EPS for the fiscal year (ending December 2023) to increase 83.7% year-over-year to $2.77. The company’s revenue for the ongoing year is expected to increase 5.1% year-over-year to $3.47 billion. However, the company has missed the consensus revenue estimates in each of the trailing four quarters, which is disappointing.

Shares of CAKE have 15.4% over the past month and 18% over the past six months to close the last trading session at $30.31.

CAKE’s POWR Ratings reflect its mixed outlook. The stock has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

CAKE has a B grade for Growth and Value. It has a C grade for Stability and Quality. It is ranked #19 out of 43 stocks in the Restaurants industry.

Click here for the additional POWR Ratings for CAKE (Momentum and Sentiment).

Stocks to Buy:

Stock #2: Papa John’s International, Inc. (PZZA)

PZZA operates and franchises pizza delivery and carryout restaurants under the Papa John’s trademark in the U.S. and internationally. The company operates through four segments: Domestic Company-Owned Restaurants; North America Commissaries; North America Franchising; and International Operations.

On August 22, Papa Johns Canada fueled fandom with its all-new Garlic Epic Stuffed Crust pizza. The latest menu addition is a direct response to a fan mania over its Epic Stuffed Crust and Special Garlic Sauce to create a stuffed crust experience like no other. The consistent progress in the product innovation is expected to boost the company’s growth and profitability.

On July 31, PZZA’s Board of Directors declared a third quarter dividend of $0.46 per common share, representing an increase of 10% from the previous dividend. The dividend was paid on August 25, 2023, to stockholders of record as of the close of business on August 14, 2023.

PZZA pays an annual dividend of $1.84, which translates to a yield of 2.4% on the prevailing share price. The company’s dividend payouts have grown at a CAGR of 13.8% over the past five years.

On June 5; PZZA announced the acquisition of restaurants previously operated by the M25 division of Drake Food Service International (DFSI) in the United Kingdom. The transition of restaurants will establish a portfolio of company-owned restaurants in the market.

The new corporate-owned restaurant portfolio will comprise 91 locations across London and other parts of the U.K. With this acquisition, the company sees several opportunities to implement operating model enhancements including revenue management capabilities, product and technological innovation and operational efficiencies, to drive higher sales.

PZZA’s revenue and EBITDA grew at CAGRs of 7.1% and 26.6%, respectively, over the past three years. The company’s net income and EPS increased at 38.2% and 76.1% CAGRs, respectively, over the same period, while its total assets grew at a CAGR of 4.9%.

PZZA’s trailing-12-month ROTC, and ROTA of 17.43% and 8.24% are favorably higher than the industry averages of 188.15% and111.74%, respectively. Moreover, the stock’s trailing-12-month CAPEX/Sales of 3.97% is 23.3% higher than the industry average of 3.22%.

During the second quarter that ended June 25, 2023, PZZA’s global system-wide restaurant sales were $1.22 billion, an increase of 2% from the prior year’s quarter. The increase reflected higher equivalent units from net restaurant opening primarily in international markets. Its adjusted net income attributable to common shareholders came in at $19.29 million.

In addition, the company reported adjusted earnings per common share of $0.59. As of June 25, 2023, its total assets were $873.64 million, compared to $864.23 million as of December 25, 2022.

The consensus revenue estimate of $530.90 million for the third quarter (ending September 2023) reflects a 4% year-over-year improvement. Likewise, the consensus EPS estimate of $0.57 for the current quarter indicates a 4.8% rise year-over-year.

Further, for the fiscal year (ending December 2024), the company’s revenue and EPS are estimated to grow 4.5% and 14.3% from the previous year to $2.26 billion and $3.05, respectively.

The stock has gained 5.5% over the past three months to close the last trading session at $76.59.

PZZA’s POWR Ratings reflect its promising prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

PZZA has a B grade for Growth, Momentum, and Quality. It is ranked #12 of 43 stocks in the Restaurants industry.

Beyond what we stated above, we also have PZZA’s ratings for Stability, Sentiment, and Momentum. Get all PZZA ratings here.

Stock #1: Carrols Restaurant Group, Inc. (TAST)

TAST, through its subsidiaries, operates as a restaurant company in the U.S. The company runs as a Burger King and Popeyes franchisee.

Commenting on TAST’s fiscal 2023 second-quarter financial performance, Deborah Derby, President and CEO of Carrols, said that the company had one of the best quarters in its 63-year history as it achieved $485.20 million of restaurant sales, delivered adjusted EBITDA of $44.30 million, generated free cash flow of $37.90 million, and reduced its net leverage ratio to 3.6 times.

Derby continued, “As we look ahead, we believe the combination of the work we have done to enhance the guest experience and the benefits from Burger King’s Royal Reset and Reclaim the Flame initiatives will continue to positively impact our traffic. Our top priorities remain fortifying our balance sheet, reducing our net debt, and staying the course on organic growth.”

Over the past three years, TAST’s revenue and EBITDA grew at CAGRs of 6.1% and 12.5%, respectively.

TAST’s restaurant sales increased 9.8% year-over-year to $485.22 million for the second quarter that ended July 2, 2023. Its adjusted EBITDA grew 193.4% from the year-ago value to $44.32 million. The company’s adjusted net income was $17.01 million and $0.27 per share, compared to an adjusted net loss of $8.90 million and $0.18 per share in the same period of 2022.

Furthermore, the company’s free cash flow came in at $37.88 million, compared to the negative $5.75 million in the prior year’s quarter. As of July 2, 2023, its cash and cash equivalents were $40.93 million, up 407.3% year-over-year. Also, its net debt was reduced to $435.89 million, compared to $502.54 million as of July 3, 2022.

Analysts expect TAST’s revenue to increase 5.6% year-over-year to $468.95 million for the third quarter ending September 2024. The company’s revenue for the current year (ending December 2023) is expected to grow 7.6% year-over-year to $1.86 billion. Also, the company has topped the consensus revenue and EPS estimates in each of the trailing four quarters.

The stock has gained 183.8% over the past six months and 343.7% year-to-date to close the last trading session at $6.30.

TAST’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.

TAST has an A grade for Growth and Sentiment. It has a B grade for Value and Momentum. It is ranked #7 in the same industry.

In addition to the POWR Ratings highlighted above, you can see TAST’s ratings for Stability and Quality here.

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CAKE shares were unchanged in premarket trading Monday. Year-to-date, CAKE has declined -2.15%, versus a 18.01% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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