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Forget McDonald's, Invest in These Restaurant Stocks Instead
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Once the industry’s darling, McDonald’s Corp. (MCD - Free Report) is now struggling to find favor with investors.
Despite the company’s turnaround plan to restructure its worldwide operations and various efforts to transform itself in a contemporary burger company, shares of McDonald’s have lost nearly 4% in the past three months.
Estimates too have been going down ahead of McDonald’s second-quarter 2016 earnings release, expected later this month. Moreover, for 2016, sales are projected to decline over 3%, further raising questions over this Zacks Rank #4 (Sell) company’s prospects.
What’s Hurting the Burger Giant?
Notably, McDonald’s has been reporting weak traffic trends for quite some time now in certain major markets due to a slowdown in the regions.
Moreover, we expect the economic slowdown in China, macroeconomic uncertainties and decreasing consumer purchasing power in Russia to remain headwinds through the rest of 2016. Also, in Europe, the economic/political conditions are expected to be challenging post Brexit which is likely to impact the company’s results.
Meanwhile, negative currency translation is a concern for McDonald’s despite the weakening of the U.S. dollar against other major foreign currencies in the recent past. Notably, management expects adverse currency translation to hurt EPS in the range of 5 cents to 7 cents for 2016. During the second quarter, currency translation is expected to dent EPS by 2 cents to 4 cents.
Moreover, of late, McDonald’s margins have been under pressure from worldwide wage increases and the trend is expected to continue through the rest of 2016.
Also, other restaurants have been working on providing customers with innovative menu options and healthier food in the fast casual restaurant space, intensifying competition for McDonald’s.
All is Not Lost
Investors, however, need not sweat bullets just yet as the restaurant industry on the whole has been doing pretty well on the back of improving consumer spending patterns, which in turn were positively influenced by rising wages and cheaper fuel. As dining out is usually directly proportional to consumers’ disposable income, restaurant sales are projected to rise further this year.
According to the industry forecast released by the National Restaurant Association (NRA) for 2016, sales at restaurants are projected to witness an upswing this year. The NRA estimates restaurant sales at around $782.7 billion in 2016.
4 Alternate Picks
With the help of the Zacks Stock Screener, we have zeroed-in on four stocks in the Retail-Restaurants industry with a solid Zacks Rank and VGM Score.
Back-tested results show that stocks with a VGM Score of ‘A’ or ‘B’ and a Zacks Rank #1 (Strong Buy) or 2 (Buy) garner better returns, on an average, than individual components, as it considers three times as many items that are correlated to stock returns.
Here are the four restaurant stocks that have better prospects than McDonald’s (VGM Score of ‘C’) and are poised for growth:
Based in Texas, Dave & Buster's Entertainment, Inc. (PLAY - Free Report) began trading in Oct 2014. The core concept of the restaurateur is “Eat Drink Play and Watch”, all in one location. Its menu comprises “Fun American New Gourmet” entrées and appetizers and a full selection of non-alcoholic and alcoholic beverages. Notably, the long-term growth prospects of this Zacks Rank #1 company are compelling, given its strong sales, earnings growth and significant margin improvement.
Interestingly, the stock surged nearly 18% in the past three months and has a VGM Score of ‘B’. Moreover, the company has been seeing an upward trend in earnings estimate revision. Over the past 60 days, the Zacks Consensus Estimate has increased 10.1% for both 2016 and 2017 earnings. Further, for full-year 2016, sales growth is pegged at 14.4% while EPS is expected to grow a solid 29.2%.
Headquartered in Louisville, KY, Papa John's International Inc. (PZZA - Free Report) operates & franchises pizza delivery and carry-out restaurants under the brand Papa John's. To become the leading chain of pizza delivery restaurants in each of its targeted markets, the company has developed a strategy to enhance customer satisfaction and retention, as well as establish recognition and acceptance of the brand. Notably, in this regard, this Zacks Rank #2 company’s focus on menu innovation, promotional offers and technology-driven inititaives bodes well.
Notably, the stock rallied nearly 23% in the past three months and carries a VGM Score of ‘A’. Upward estimate revisions for 2016 and 2017 earnings add to the optimism. Moreover, for full-year 2016, sales and EPS are projected to grow a respective 4.1% and 15.5%.
Headquartered in Syracuse, NY, Carrols Restaurant Group, Inc. (TAST - Free Report) operates through its subsidiaries and is one of the largest restaurant companies in the U.S. This Zacks Rank #1 company is the largest Burger King franchisee, based on restaurant count. The company’s astounding earnings growth, significant improvement in the top line and operating margin along with innovative product introductions hold well for long-term growth.
Notably, the stock boasts a VGM Score of ‘A’ and has been seeing an upward trend in earnings estimate revision for 2016. Additionally, for full-year 2016, sales growth is pegged at 10.5% while EPS is likely to improve a solid 55.3%.
Headquartered in Minneapolis, MN, Buffalo Wild Wings Inc. is one of the most popular casual dining restaurant chains in the U.S. The company has been posting positive comps over the past few years driven by strong market standing, new menu launches and increased media exposure. Also, the company’s associations with the National Collegiate Athletic Association NCAA and beverage chains should continue expanding its brand portfolio.
Notably, this Zacks Rank #2 company has a VGM Score of ‘A’. Also, upward estimate revisions for 2016 reinstate hope on the stock’s prospects. Further, for full-year 2016, EPS is expected to grow a healthy 15.4%, while sales growth stands at 14.1%.
Bottom Line
At this juncture, it does seem like dumping McDonald’s might be a prudent move. However, keeping in mind the rosy forecast for restaurants in 2016, investors should not shy away from putting money into this space and cash in on the bountiful opportunities.
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Forget McDonald's, Invest in These Restaurant Stocks Instead
Once the industry’s darling, McDonald’s Corp. (MCD - Free Report) is now struggling to find favor with investors.
Despite the company’s turnaround plan to restructure its worldwide operations and various efforts to transform itself in a contemporary burger company, shares of McDonald’s have lost nearly 4% in the past three months.
Estimates too have been going down ahead of McDonald’s second-quarter 2016 earnings release, expected later this month. Moreover, for 2016, sales are projected to decline over 3%, further raising questions over this Zacks Rank #4 (Sell) company’s prospects.
What’s Hurting the Burger Giant?
Notably, McDonald’s has been reporting weak traffic trends for quite some time now in certain major markets due to a slowdown in the regions.
Moreover, we expect the economic slowdown in China, macroeconomic uncertainties and decreasing consumer purchasing power in Russia to remain headwinds through the rest of 2016. Also, in Europe, the economic/political conditions are expected to be challenging post Brexit which is likely to impact the company’s results.
Meanwhile, negative currency translation is a concern for McDonald’s despite the weakening of the U.S. dollar against other major foreign currencies in the recent past. Notably, management expects adverse currency translation to hurt EPS in the range of 5 cents to 7 cents for 2016. During the second quarter, currency translation is expected to dent EPS by 2 cents to 4 cents.
Moreover, of late, McDonald’s margins have been under pressure from worldwide wage increases and the trend is expected to continue through the rest of 2016.
Also, other restaurants have been working on providing customers with innovative menu options and healthier food in the fast casual restaurant space, intensifying competition for McDonald’s.
All is Not Lost
Investors, however, need not sweat bullets just yet as the restaurant industry on the whole has been doing pretty well on the back of improving consumer spending patterns, which in turn were positively influenced by rising wages and cheaper fuel. As dining out is usually directly proportional to consumers’ disposable income, restaurant sales are projected to rise further this year.
According to the industry forecast released by the National Restaurant Association (NRA) for 2016, sales at restaurants are projected to witness an upswing this year. The NRA estimates restaurant sales at around $782.7 billion in 2016.
4 Alternate Picks
With the help of the Zacks Stock Screener, we have zeroed-in on four stocks in the Retail-Restaurants industry with a solid Zacks Rank and VGM Score.
Back-tested results show that stocks with a VGM Score of ‘A’ or ‘B’ and a Zacks Rank #1 (Strong Buy) or 2 (Buy) garner better returns, on an average, than individual components, as it considers three times as many items that are correlated to stock returns.
Here are the four restaurant stocks that have better prospects than McDonald’s (VGM Score of ‘C’) and are poised for growth:
Based in Texas, Dave & Buster's Entertainment, Inc. (PLAY - Free Report) began trading in Oct 2014. The core concept of the restaurateur is “Eat Drink Play and Watch”, all in one location. Its menu comprises “Fun American New Gourmet” entrées and appetizers and a full selection of non-alcoholic and alcoholic beverages. Notably, the long-term growth prospects of this Zacks Rank #1 company are compelling, given its strong sales, earnings growth and significant margin improvement.
Interestingly, the stock surged nearly 18% in the past three months and has a VGM Score of ‘B’. Moreover, the company has been seeing an upward trend in earnings estimate revision. Over the past 60 days, the Zacks Consensus Estimate has increased 10.1% for both 2016 and 2017 earnings. Further, for full-year 2016, sales growth is pegged at 14.4% while EPS is expected to grow a solid 29.2%.
Headquartered in Louisville, KY, Papa John's International Inc. (PZZA - Free Report) operates & franchises pizza delivery and carry-out restaurants under the brand Papa John's. To become the leading chain of pizza delivery restaurants in each of its targeted markets, the company has developed a strategy to enhance customer satisfaction and retention, as well as establish recognition and acceptance of the brand. Notably, in this regard, this Zacks Rank #2 company’s focus on menu innovation, promotional offers and technology-driven inititaives bodes well.
Notably, the stock rallied nearly 23% in the past three months and carries a VGM Score of ‘A’. Upward estimate revisions for 2016 and 2017 earnings add to the optimism. Moreover, for full-year 2016, sales and EPS are projected to grow a respective 4.1% and 15.5%.
Headquartered in Syracuse, NY, Carrols Restaurant Group, Inc. (TAST - Free Report) operates through its subsidiaries and is one of the largest restaurant companies in the U.S. This Zacks Rank #1 company is the largest Burger King franchisee, based on restaurant count. The company’s astounding earnings growth, significant improvement in the top line and operating margin along with innovative product introductions hold well for long-term growth.
Notably, the stock boasts a VGM Score of ‘A’ and has been seeing an upward trend in earnings estimate revision for 2016. Additionally, for full-year 2016, sales growth is pegged at 10.5% while EPS is likely to improve a solid 55.3%.
Headquartered in Minneapolis, MN, Buffalo Wild Wings Inc. is one of the most popular casual dining restaurant chains in the U.S. The company has been posting positive comps over the past few years driven by strong market standing, new menu launches and increased media exposure. Also, the company’s associations with the National Collegiate Athletic Association NCAA and beverage chains should continue expanding its brand portfolio.
Notably, this Zacks Rank #2 company has a VGM Score of ‘A’. Also, upward estimate revisions for 2016 reinstate hope on the stock’s prospects. Further, for full-year 2016, EPS is expected to grow a healthy 15.4%, while sales growth stands at 14.1%.
Bottom Line
At this juncture, it does seem like dumping McDonald’s might be a prudent move. However, keeping in mind the rosy forecast for restaurants in 2016, investors should not shy away from putting money into this space and cash in on the bountiful opportunities.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>