Troubles broiling in the U.S. restaurant industry over the past few quarters are known to all by now.
The amalgamation of consumer spending uncertainty in dining out, rising costs, weak comps, higher restaurant prices, decline in at-home food costs, market saturation and changing preferences of consumers has been weighing on sales and hurting performance. Resultantly, over a year, while Zacks Restaurant Industry gained 5.2%, the broader index added 12.9%.
However, despite the buzz over the so-called restaurant recession, a gradually improving U.S. economy — courtesy of a solid employment picture, rising wages, higher real income and increased household net worth — has reinforced consumer confidence and sentiment. In fact, the Consumer Confidence Index climbed from July’s reading of 120 to 122.9 in August.
This positive sentiment is likely to encourage consumers to dine out more and thereby put a check on declining traffic. In fact, restaurants are likely to be the first to gain from an improving economy and employment trend. Besides, restaurateurs are undertaking various sales building and digital initiatives to enhance guest experience and, in turn, drive traffic and comps.
Furthermore, according to the National Restaurant Association, 2017 is set to be the eighth consecutive year of real sales growth in this industry.
Additionally, long-term trends favoring eating out over eating at home are still in place. Thus, operators with solid fundamentals along with sufficient capacity for innovation and willing to evolve and stand out in a competitive market will continue to reap profits and remain compelling bets.
3 Restaurant Growth Plays
Growth investors look for stocks with aggressive earnings or revenue growth potential, which propel share price. With the help of the Zacks Style Score system, we have identified three restaurant stocks with excellent growth potential. These stocks have a solid Zacks Rank as well.
Our research shows that stocks with a Growth Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the growth investing space.
Here we put the spotlight on three restaurant stocks that are poised for healthy growth:
Headquartered in Louisville, KY, Papa John's International Inc. (PZZA - Free Report) operates and 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 commitment to provide quality food along with focus on product and digital innovation to attract new customers as well as drive growth and efficiency bodes well. You can see the complete list of today’s Zacks #1 Rank stocks here.
Notably, the stock carries a Growth 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 for current-year earnings has increased 1.4%. Additionally, for 2017, sales growth is pegged at 4.5% while EPS is likely to grow a solid 11.8%. Further, the stock has a long-term expected EPS growth rate of 13%.
Based in Columbus, OH, Bravo Brio Restaurant Group, Inc. is an owner and operator of two distinct Italian restaurant brands, BRAVO! Cucina Italiana and BRIO Tuscan Grille. Notably, the long-term growth prospects of this Zacks Rank #2 company are compelling given continual focus on driving traffic via improvement in guest satisfaction scores and enhanced hospitality training program, menu innovation and other sales-driving initiatives.
Notably, the company flaunts a Growth Score of A. Moreover, an 8.3% rise in estimate revisions for current-year earnings add to the optimism in the stock. Additionally, for 2017, EPS is likely to witness an increase of 50%. Its long-term projected EPS growth rate is 10.3%.
Headquartered in Lake Forest, CA, Del Taco Restaurants Inc. (TACO - Free Report) is the second largest Mexican-American QSR chain by units in the United States, serving more than three million guests each week. This Zacks Rank #2 company’s strong expansion plans along with strategic initiatives including effective marketing, menu innovation and provision of limited time offers are likely to drive sales. Additionally, Del Taco’s focus on expanding its mobile and online ordering platform as well as testing out delivery options hold well for long-term growth.
Del Taco has a Growth Score of B. Upward estimate revisions for current-year earnings add to the optimism. Moreover, for 2017, sales and EPS are projected to grow a respective 4.5% and 6.3%. Further, the stock has a long-term expected EPS growth rate of 16.7%.
While the restaurant industry is still grappling, effective sales and digital initiatives undertaken, particularly enhanced focus on mobile ordering and delivery to cater to ever-changing wants and needs of customers, are likely to help its stocks in getting their mojo back.
Picking any of the above-mentioned stocks with compelling growth prospects might offer solid returns even in this challenged market and satisfy your investment appetite.
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