Who’s hungry? Investors.
As the decade winds up, investors are on the lookout for the names that have what it takes to outperform the market and to fork over solid returns in the years to come. However, given the uncertainty hanging over the market as we head into 2020, zeroing in on the most compelling investment opportunities isn’t an easy job. So what’s an investor to do? We suggest following Wall Street’s lead as the analysts can provide a wealth of investing inspiration.
Setting out on our own search, we rolled up our sleeves and got down to business, turning to the best of the best, investing firm RBC Capital. Not only does the firm take first place on TipRanks’ Top Performing Research Firms ranking, but it also houses some of the top rated analysts on the Street.
Using the in-depth market data and investing tools from TipRanks.com, we were able to get the full scoop on 3 buy-rated restaurant stocks that one of the firm’s analysts, Christopher Carril, recommends snapping up. Let’s dig in.
Restaurant Brands International (QSR)
Restaurant Brands owns some of the most well-known quick service restaurant brands including Burger King, Tim Hortons and Popeyes. With over $32 billion in system-wide sales and about 26,000 restaurants, the RBC analyst likes QSR’s position in the industry.
Carril just started up his coverage of the restaurant company by telling investors that QSR has a lot going for it. QSR is clearing the path to reach 40,000 units over the next eight to ten years, with Carril citing Burger King as the key driver of growth. However, even with the above average global systems sales growth witnessed year-to-date and accelerating comp growth for Burger King and Popeyes, its valuation matches that of its competitors in the space. This is partly due to Tim Hortons weakness, which is responsible for about half of the total operating profit. Having said that, the analyst points to QSR’s “near best-in-class unit growth (5%+), current momentum at BK/PLK, significant scale and potential to add brands in the future as key positives for a stock that remains attractively valued” as making it a stand-out.
Adding to the good news, Carril believes that the company can turn things around at Tim Hortons. “Continued store remodels should provide a stronger foundation for Tims to add to its dominant market share in its home market, where competition has sharpened its focus in recent years. Furthermore, we see adjustments to the recently launched Tims Rewards program—such as transitioning members to the digital platform—as important to unlocking the long-term value of the loyalty program,” he commented.
Bearing this in mind, Carril initiated coverage by issuing an Outperform rating and setting a $77 price target. Given this target, he believes that shares could rise 15% in the next twelve months. (To watch Carril’s track record, click here)
In general, the rest of the Street agrees with the RBC analyst. With 11 Buys and 2 Holds assigned in the last three months, the word on the Street is that QSR is a Strong Buy. To top it all off, other analysts are more aggressive with their forecasts as the $79 average price target indicates 18% upside potential. (See Restaurant Brands stock analysis on TipRanks)
Starbucks Corporation (SBUX)
The iconic coffee company just received a vote of confidence from Carril thanks to changes that have taken place over the last few years.
Part of the excitement related to Starbucks has been generated by its back to basics approach. Back in 2017 and 2018, the company pivoted away from its strong service and beverage-led innovation strategy as concerns regarding the emerging third-wave coffee threat and cannibalization arose. Carril argues that SBUX appears to have “course-corrected”, revamping the in-store experience by refocusing labor towards guest-facing tasks and improving its beverage platform. These efforts already appear to be paying off as its Nitro Cold Brew has driven 3%-plus traffic growth in the last two quarters.
The improvements haven’t stopped there. The coffee company has given its business model a refresh by shifting almost 900 company stores to licensed across various markets, agreeing to a licensing deal for its packaged goods and foodservice segment with Nestle, bumping up shareholder returns through share repurchases and dividends as well as taking advantage of its full company ownership in its China business.
“We see these changes as supportive of SBUX’s ‘growth at scale’ strategy, aiming to deliver on its long-term earnings growth objectives,” Carril wrote in a note to clients. Further, he adds, “SBUX is among only a handful of $100B+ market cap consumer companies expected to drive double-digit EPS growth over the next three years. We see the recent pullback given the expectation of below double-digit EPS growth in full-year 2020 (following two years of +17% growth) as providing a compelling entry point.”
To this end, Carril initiated his SBUX coverage with a bullish call. Along with the Outperform rating, the $97 price target puts the potential twelve-month gain at 13%.
Turning to other Wall Street analysts now, opinions are split. Out of 13 total analysts covering SBUX, 7 agree with Carril while 6 recommend a Hold, making the consensus a Moderate Buy. In addition, the upside potential comes in slightly lower than Carril’s estimate at 12%. (See Starbucks stock analysis on TipRanks)
McDonald’s Corporation (MCD)
The fast food company symbolized by those famous yellow arches has definitely lagged year-to-date, up 10% compared to the S&P 500’s 25% gain. That being said, Carril thinks that McDonald’s is creating an “experience” that should serve as the foundation for future upside.
MCD has made a significant investment in its domestic business. Through its acquisition of Dynamic Yield, which will enable it to use AI to improve the customer experience, and its Experience of the Future (EOTF) store remodels, the company could see substantial same store sales momentum.
Carril also cites accelerating free cash flow (FCF) and a return of capital to shareholders as key positives. Overall capex is expected to drop starting in 2021 with the completion of the EOTF upgrades. “This should help to drive an acceleration in FCF (RBCe 15%-plus year-over-year to ~$6.6 billion in 2021) and supports MCD’s continued return of capital to shareholders. We expect a new three-year cash return target to be unveiled in early 2020, and model $27 billion in total dividends and share repurchases over the next three years, which is above consensus’ ~$26 billion estimate and greater than the expected $25 billion returned from 2017-2019E,” he explained.
Not to mention Carril expects the burger chain to return to HSD EPS growth in 2020 as a result of the “underappreciated” Dynamic Yield purchase and ETOF. “While we acknowledge incremental depreciation (related to the EOTF rollout) and G&A (from tech acquisitions) will remain headwinds in the near-term, we see continued top-line strength—driven by global system sales growth of ~5%—as the key driver for our 2020 EPS estimate of $8.37 (7%-plus year-over-year), which is slightly more conservative vs. consensus of $8.48,” he noted.
All of the above factors prompted Carril to start his coverage with a bang, namely an Outperform rating. The $218 price target conveys his confidence in MCD’s ability to move 12% higher in the twelve months ahead.
What does the rest of the Street have to say? Given the 17 Buys and 6 Holds received in the last three months, the consensus among analysts is that MCD is a Moderate Buy. Also, the $220.15 average price target brings the upside potential to 13%. (See McDonald’s stock analysis on TipRanks)