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Hungry for Growth? 3 Restaurant Payment Stocks to Consider

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The Roman Empire is thought to have had the longest reign of any known empire in history. Like most empires, in time, history tells us that the reign of the “old guard” comes to an end, and new, prosperous, more innovative kingdoms fill the open void. The same is evident in the highly competitive restaurant industry.

The COVID-19 pandemic forever changed the restaurant industry landscape. Nearly a third of restaurants closed permanently in states like California (where strict lockdowns were imposed). In other cases, the pandemic caused unique, rapid shifts to in the industry, such as the widespread rollout of “ghost kitchens”, online takeout and delivery options, and the necessity of a more prominent online presence.

In a complex, ever-changing restaurant market, back-end software and organization are becoming absolutely critical. As the infamous investor and philanthropist Paul Tudor Jones warns, companies must “adapt, evolve, compete or die.” One current sub-industry helping restaurants to modernize is the restaurant payments industry. Today we will discuss 3 innovative software and payment companies assisting restaurants to run more effectively:

1.   Zacks Rank #2 (Buy) stock Toast Inc (TOST - Free Report) is a cloud-based company that runs on Amazon’s (AMZN - Free Report) Web Services infrastructure. Toast builds software to help restaurants manage dine-in and takeout payments, payroll, reservations, and more. Despite cutting half of its workforce in April 2020 in the heat of the pandemic, Toast went public in 2021. Since then, the company has been a top performer from a fundamental perspective. For six straight quarters, Toast’s top-line growth has eclipsed 50%.

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Pictured: TOST's quarterly revenue growth.

Toast has delivered substantial revenue growth despite the fact that the restaurant industry is still struggling to rebound from the pandemic, has been slapped with higher food input costs, and is operating in an environment where the average consumer is less well off.  

What is driving the impressive results? Acquisitions, innovations, and word-of-mouth referrals. Toast is quickly becoming a one-stop shop for restaurant needs beyond payments. For example, Toast acquired a company called Sling, which helps restaurants and employees to manage time off, scheduling, and employee communication. Toast also recently acquired supplier management firm xtraChef for nearly $50 million. As more companies benefit from using Toast’s expanding menu of products, restaurants are spreading the word to each other via referrals. Toast also plans to expand outside of the U.S. in the coming quarters.

Like most of the U.S. equity market, TOST shares struggled early in 2022. However, recently, shares have regained the 200-day moving average and are beginning to show signs of life. Toast has also flashed positive surprises on earnings for three straight quarters, and has a positive Expected Earnings Surprise Prediction (ESP) score into its earnings report, which is slated for this Thursday.

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Pictured: TOST's EPS surprise history.

2.   Shift4 Payments Inc (FOUR - Free Report) is an integrated payment processing provider offering its services to the restaurant, entertainment, and e-commerce industries – to name a few. Unlike Toast, Shift4 has achieved profitability since 2021, but holds a lower Zacks Ranking of 3 (hold). Its impressive line of customers includes names such as Best Western Hotels and Resorts, Choice Hotels Intl (CHH - Free Report) , and Caesars Entertainment (CZR - Free Report) . Though Shift4 does not hold as high of a Zacks Rank as Toast, the company has proven to Wall Street that it can grow in recent quarters. In the past two quarters EPS grew at 69% and 43%.

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Pictured: FOUR's EPS growth trajectory.

Shift4 is slated to report earnings on February 28th.

3.   Block Inc (SQ - Free Report) , formerly known as Square, is an incumbent and leader in the niche restaurant payment space. Block became popular with restaurants and food trucks because of its Square payment technology which allows restaurants to efficiently process and track payments and allow customers to leave tips quickly. Though Block’s quarterly EPS growth decelerated for four straight quarters, it began to accelerate again last quarter. From a value perspective, the stock is also becoming attractive once again. Block’s price/book is at its lowest level in more than five years.

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Pictured: SQ price/book value.

Takeaway  

The many recent challenges in the restaurant industry have opened the door up for innovation in the restaurant payment processing and software space. Restaurants looking to compete in today’s environment must have a wide array of offerings, such as takeout, an online presence, and straightforward payment processing. As costs rise and customer wallets shrink, restaurant’s back end must be buttoned up from a financial, supply chain management, and human resource perspective. Companies such as Toast, Shift4, and Block are uniquely positioned to take advantage of the complex and challenging restaurant environment.

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