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Restaurants Set to Sail Through 2023

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The pandemic was a bad time for restaurants, as people stayed home and in-person socializing came to a screeching halt. Not all the people who started working from home have yet come back, which means that people aren’t spending their days in the same localities they had been. Plus, the industry has been seeing its share of input cost inflation, courtesy the supply chain issues, as well as tightness in labor supply, both of which have been increasing costs.

All these challenges notwithstanding, the industry is doing rather well. Many people are going out again -- and are eager to make up for lost time. They’re willing to spend more: higher prices for the same dishes are being lapped up enthusiastically. Recently-released BLS CPI data for February explains how restaurants are benefiting from the devotion of consumer funds to the segment.

Accordingly, prices of food away from home continue to escalate at a faster clip than at-home consumption, which is still impacted by the particular dynamics in meat (supply tightening), eggs (avian flu), wheat and oils (Russia-Ukraine war), etc. So food away from home increased at double the rate of at-home consumption, with full-service meals increasing almost as much as limited service meals. USDA estimates that food at home prices will increase 8.6% in 2023 while food away from home will increase 8.3%.

Banking crisis or not, recession or not, people have to eat. And the trend indicates that when eating at home, consumers are going for pre-cut, pre-seasoned, convenient options. And when eating out, they are opening up their wallets. Since the jobs data still looks relatively stable despite recent layoffs, this trend is likely to continue. Therefore, restaurants look like a good place to preserve capital in the current environment:

Chuy's Holdings, Inc. (CHUY - Free Report)

Austin, TX-based Chuy's Holdings, through its subsidiaries, owns and operates full-service restaurant chains across Texas, Alabama, Indiana, Kentucky and Tennessee. The Chuy's brand is known for its authentic Mexican food including appetizers, soups and salads, tacos, burritos, enchiladas, fajitas and combination platters.

The Zacks Rank #1 (Strong Buy) stock is on track to grow its revenue10.8% in 2023 and 7.2% in 2024. A good bit of this will fall through to the bottom line, which is expected to grow 19.0% in 2023 and 8.0% in 2024. Analysts have taken their 2023 estimate up 6 cents on average while trimming their 2024 estimates a penny in the last 30 days.

All estimates are up substantially from 60 days ago. Chuy’s also has a good surprise history, having topped the Zacks Consensus Estimate by over 19% in the last four quarters.

The shares are trading at a 12.3% discount to the industry based on P/E, which indicates room for further upside.

Darden Restaurants, Inc. (DRI - Free Report)

Orlando, Florida-based Darden Restaurants is another owner-operator of more than 1,700 full-service restaurants in the U.S. and Canada. It operates under Olive Garden (47% 2022 revenue); LongHorn Steakhouse (25%); The Capital Grille and Eddie V's Prime Seafood (Fine Dining segment, 8% revenue share); Cheddar's Scratch Kitchen, Yard House, Seasons 52, Bahama Breeze and Capital Burger brands (Other Business segment, 25%).

Darden estimates have been rising over the last 30 days with the Zacks Consensus Estimate increasing 5 cents for 2023 and 6 cents for 2024. This represents 6.1% earnings growth on 8.1% growth in revenue in 2023 followed by 10.4% earnings growth on 5.5% increase in revenue in 2024. The surprise history in the last few quarters is also positive for the Zacks #2 (Buy) ranked stock.

The shares are trading at a 26.9% discount to the industry, making them one of the cheaper bets in the industry.

J D Wetherspoon plc (JDWPY - Free Report)

Watford, UK-based J D Wetherspoon owns and operates pubs in the UK and Ireland. It provides quality food and drinks through well-trained staff at reasonable prices.

Zacks #2 ranked Wetherspoon is expected to grow its revenue 112.3% in 2023, which will be followed by around 4% growth the following year. This is expected to take its 2022 loss of $1.29 to a profit of $1.51 in 2023. Earnings are then expected to grow another 40.1% in 2024.

On a price-to-sales (P/S) basis, the shares trade at an 88.2% discount to the industry. The P/S value being less than 1 is also a sign of undervaluation.

Carrols Restaurant Group, Inc. (TAST - Free Report)

Syracuse, NY-based Carrols Restaurant Group is known as the largest Burger King franchisee operating in the U.S., under the Popeye brand. It has operated Burger King restaurants since 1976 and currently operates over 800 restaurants.

Carrols is expected to grow its revenue 4.5% in 2023 and 2.8% in 2024. This is expected to help it narrow its losses in 2023 by around 51% and in 2024 by around 44%. The loss estimates for both years are showing a declining trend in the last 30 days. It has also posted very strong surprises in the last two quarters.

The shares trade at a huge discount (97.9%) to the industry on a P/S basis, which makes them worth considering. The P/S is also less than 1, which means that investors are undervaluing the revenue potential.

One-Month Price Performance

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