Despite elevated prices weighing on consumer spending, the restaurant industry’s performance has remained resilient. A steady upswing was observed in restaurant sales throughout the year.

Given this backdrop, quality restaurant stocks Papa John's International, Inc. (PZZA), McDonald's Corporation (MCD), and Chuy's Holdings, Inc. (CHUY) could be solid buys for investors eager to partake in this sector's potential growth.

Before comprehensively analyzing these stocks, let’s familiarize ourselves with what is shaping the restaurant sector’s prospects.

Despite inflationary pressures gnawing at consumer budgets, the restaurant industry resolutely continued to rise above. Its sales have remained relatively resilient. According to the National Restaurants Association (NRA), U.S. bars and restaurant sales totaled $91.1 billion in July, up 1.4% month-over-month, marking the third consecutive month of solid growth, following solid gains of 1.6% in May and 0.8% in June.

Also, NRA expects the food service industry to reach $997 billion in sales in 2023, with one key factor fueling this trend being the surge in menu prices, a consequence of broader inflationary trends.

Moreover, since the aftermath of the pandemic, the demand for online food delivery services has experienced a significant boost, providing consumers with access to diverse restaurant offerings and cuisines. As consumer tastes and preferences evolve, industry participants who readily adapt will likely attain greater success.

With the increased incorporation of high-tech innovations such as AI-powered analytics tools, the potential to enhance user experiences, trim down operational expenses, mitigate the risk of human error, and ultimately provide restaurants with a competitive edge becomes undeniably palpable.

NRA’s chief operating officer, Michelle Korsmo, said, “The state of our industry is thriving again.” The future belongs to the innovators and early adopters.

Furthermore, the global food and beverages market is poised to reach $9.23 trillion by 2027, growing at a CAGR of 6.3%.

With these favorable trends in mind, let's delve into the fundamentals of the three best Restaurant stock picks, beginning with the third choice.

Stock #3: Papa John's International, Inc. (PZZA)

PZZA operates and franchises pizza delivery and carryout restaurants under Papa John's trademark in the United States and internationally. It operates through four segments: Domestic Company-Owned Restaurants; North America Commissaries; North America Franchising; and International Operations.

Last month, PZZA introduced its all-new Garlic Epic Stuffed Crust pizza. The latest menu innovation directly responds to fan mania over its Epic Stuffed Crust and Special Garlic Sauce to create a stuffed crust experience. With this introduction, the company anticipates accelerating its growth momentum in the upcoming quarter.

The company paid cash dividends of $13.9 million ($0.42 per common share) in the second quarter of 2023. On August 25, 2023, PZZA paid the third-quarter dividend of $0.46 per common share, representing a 10% increase from the previous dividend.

Its annual dividend of $1.84 yields 2.40% on prevailing share prices. Its four-year dividend yield is 1.40%. The company’s dividend payouts have grown at CAGRs of 24.1% and 13.8% over the past three and five years, respectively.

The stock’s trailing-12-month ROTC and ROTA of 17.43% and 8.25% are 188.2% and 111.7% higher than the 6.05% and 3.89% industry averages, respectively. Likewise, its trailing-12-month asset turnover ratio of 2.43x is 143.7% higher than the industry average of 1x.

For the fiscal second quarter that ended June 25, 2023, PZZA’s total revenues stood at $514.53 million, while its adjusted operating income came at $36.88 million. Its adjusted net income attributable to common shareholders and adjusted earnings per common share stood at $19.29 million and $0.59, respectively.

For the six months that ended June 25, 2023, net cash provided by operating activities increased 105.6% year-over-year to $93.74 million. Moreover, as of June 25, 2023, PZZA’s retained earnings stood at $207.46 million, compared to $195.86 million as of December 25, 2022.

Street expects PZZA’s revenue and EPS to increase 4% and 4.8% year-over-year to $530.90 million and $0.57 for the fiscal third quarter ending September 2023.

PZZA’s stock has gained 8.5% over the past three months to close its last trading session at $76.59. The stock is trading above its 100-day moving average of $76.09.

PZZA’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

PZZA has a B grade for Growth, Momentum, and Quality. Within the B-rated 44-stock Restaurant industry, it is ranked #12.

Beyond what we have stated above, one can see PZZA’s additional POWR Ratings for Value, Stability, and Sentiment here.

Stock #2: Chuy's Holdings, Inc. (CHUY)

CHUY owns and operates full-service restaurants under the Chuy’s name in the United States.

During the second quarter of 2023, the company repurchased 83,521 shares of its common stock for a total of approximately $3.0 million. As of June 25, 2023, the company had $47 million remaining under the share repurchase program.

The stock’s trailing-12-month net income and EBITDA margins of 11.69% and 5.97% are 38.8% and 7.1% higher than the 4.30% and 10.92% industry averages, respectively. Likewise, its trailing-12-month ROTA of 5.42% is 39.2% higher than the industry average of 3.89%.

Its revenue and levered FCF have increased at CAGRs of 6% and 6.1% over the past three years, respectively. Over the same period, its EBIT improved at a CAGR of 47.4%.

In the fiscal second quarter that ended June 25, 2023, CHUY’s revenue increased 7.3% year-over-year to $119 million, while its income from operations improved by 36.1% from the year-ago value to $11.69 million. In addition, the company’s adjusted net income amounted to $11.11 million and $0.61 per share, up 31.6% and 38.6% from the prior-year quarter, respectively.

For the fiscal year 2023, the company expects adjusted net income per diluted share of $1.80 to $1.85. Moreover, CHUY expects to open five new restaurants during the period.

The consensus revenue and EPS estimates of $111.97 million and $0.36 for the fiscal third quarter ending September 2023 represent 5% and 16.9% year-over-year improvements, respectively. Moreover, the company topped the revenue and EPS estimates in each of the trailing four quarters, which is impressive.              

CHUY’s shares have gained 60.5% over the past year to close the last trading session at $36.16. It gained 27.8% year-to-date. It is trading higher than its 200-day moving average of $35.77.

CHUY’s POWR Ratings reflect its positive outlook. It has an overall rating of B, which equates to Buy in our proprietary rating system.

It has a B grade for Momentum. Within the same industry, it is ranked #5.

In addition to the POWR Ratings we’ve stated above, we also have CHUY’s ratings for Growth, Value, Stability, Sentiment, and Quality. Get all CHUY ratings here.

Stock #1: McDonald's Corporation (MCD)

MCD operates and franchises its restaurants in the United States and internationally. The company’s segments include the United States (U.S.); International Operated Markets (IOM); and International Developmental Licensed Markets & Corporate (IDL).

On July 25, 2023, MCD's board of directors declared a quarterly cash dividend of $1.52 per share of common stock, payable to the shareholders on September 18.

Its annual dividend of $6.08 per share yields 2.18% on prevailing share prices. Its four-year dividend yield is 2.24%. The company’s dividend payouts have grown at CAGRs of 6.7% and 8.5% over the past three and five years, respectively.

MCD’s trailing-12-month ROTA of 15.86% is 307.4% higher than the industry average of 3.89%. Its trailing-12-month EBIT margin of 45.89% is 530.8% higher than the industry average of 7.28%.

For the fiscal second quarter that ended June 30, 2023, MCD’s revenues increased 13.6% year-over-year to $6.50 billion. Its net income rose 94.5% over the prior-year quarter to $2.31 billion, while its earnings came in at $3.15, representing an increase of 96.9% year-over-year. The company’s operating income increased 81.3% year-over-year to $3.10 billion.

Analysts expect MCD’s revenue to increase 9.7% year-over-year to $25.43 billion for the year ending December 2023. Its EPS is expected to grow 14.7% year-over-year to $11.59 in 2023. It surpassed revenue and EPS estimates in all four trailing quarters.

MCD’s stock has gained 7.6% over the past year to close its last trading session at $279.22. Over the past six months, it gained 6.6%.

MCD’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.

MCD has an A grade for Quality and a B for Momentum, Sentiment, and Stability. Within the Restaurant industry, it is ranked #4.

Click here for the MCD’s additional POWR Ratings for Growth and Value.

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MCD shares were trading at $279.11 per share on Monday morning, down $0.11 (-0.04%). Year-to-date, MCD has gained 7.66%, versus a 17.74% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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