These restaurant companies are expected to show the fastest growth through 2026

By Philip van Doorn

Recent winners that are expected to continue rapid expansion include Wingstop, Domino's and Chipotle, while Starbucks is expected to get its house in order

Running a restaurant can be a difficult and risky business, and if we look back over the past five years, starting from a time before the COVID-19 pandemic, we can see that the U.S. industry as a whole has underperformed. But its future may be bright.

According to an article published Monday in the Wall Street Journal, restaurants are the "new real-estate darlings" for retail landlords. This desire for dining establishments as tenants reflects not only record revenue for the industry, but that a whopping 53% of U.S. consumers' food spending is done outside the home. That is "a record-high proportion and up 10 percentage points from 2003," according to the Wall Street Journal article, which cited data from the U.S. Agriculture Department's Economic Research Service.

People are willing to spend a lot of money to dine at restaurants or on takeout food. While that's good for the retail landlords lucky enough to score successful restaurant tenants, what does it mean for investors in the stock market? Below are the results of screens of 36 publicly traded restaurants listed on U.S. exchanges, drawn from the holdings of the Vanguard Russell 3000 exchange-traded fund VTHR, which tracks the Russell 3000 Index RUA by holding 2,918 stocks.

A look at the S&P 500 restaurant sector

First, let's compare forward price-to-earnings ratios and estimated compound annual growth rates for sales and earnings per share for the S&P 500 restaurant industry group with those of the 11 sectors of the S&P 500 SPX. The restaurants are listed first, then the sectors alphabetically, with the full index at the bottom. All are weighted by companies' market capitalization.

   Industry, sector or index    Forward P/E  5-year est. sales CAGR through 2024  Two-year est. sales CAGR through 2026  Five-year est. EPS CAGR through 2024  Two-year est. EPS CAGR through 2026 
   S&P 500 Restaurants                 23.7                                 7.6%                                   7.7%                                  8.9%                                11.1% 
   Communication Services              19.0                                 7.7%                                   5.8%                                 12.2%                                13.1% 
   Consumer Discretionary              24.4                                 5.4%                                   7.1%                                  9.7%                                16.0% 
   Consumer Staples                    20.5                                 5.6%                                   4.2%                                  5.4%                                 7.8% 
   Energy                              11.9                                 5.7%                                   0.2%                                 20.6%                                 7.8% 
   Financials                          15.0                                 7.0%                                   4.8%                                  6.6%                                11.6% 
   Healthcare                          19.6                                 8.4%                                   6.2%                                  4.1%                                14.4% 
   Industrials                         20.8                                 4.8%                                   8.7%                                  8.7%                                16.0% 
   Information Technology              29.0                                 7.7%                                   5.5%                                 13.4%                                13.5% 
   Materials                           19.8                                 4.9%                                   3.4%                                  7.5%                                13.2% 
   Real Estate                         16.7                                 4.0%                                   6.5%                                  4.6%                                 6.6% 
   Utilities                           16.8                                 3.1%                                   4.0%                                  4.1%                                 8.1% 
   S&P 500                             20.8                                 6.6%                                   5.8%                                  9.1%                                13.1% 
                                                                                                                                                                                   Source: FactSet 

The table also includes forward price-to-earnings ratios, based on current prices and consensus estimates for the next 12 months. By this measure, the S&P 500 restaurant group's weighted valuation is higher than any sector except for the information technology and consumer discretionary sectors. Then again, the restaurant group's estimated five-year sales-growth pace has only slightly trailed that of the IT and communications sectors, while it has been well ahead of the growth pace for the full S&P 500. Looking ahead, the restaurant group's pace of sales growth is expected to accelerate slightly through 2026 and to exceed those of all sectors except for industrials.

All but four of the sectors and the full index are expected to show higher paces for EPS growth than the restaurant industry through 2024. This reflects the restaurants' profit-margin pressures as costs rise.

In case you are wondering, the total return for the S&P 500 restaurant group, with dividends reinvested, was 51.7% for the past five years through Friday, compared with a return of 101.1% for the full S&P 500.

A broader screen of restaurant stocks

Now let's run some screens, starting with our larger list of 36 restaurant stocks in the Russell 3000. First we will pare the list to 27 companies that are covered by at least five analysts polled by FactSet, in order to have a decent sample for a screen that incorporates analysts' consensus estimates and price targets.

Earnings-season winners

With first-quarter earnings season now over, we can assess results by looking at sales growth and profit margins. For restaurants as for retailers, investors focus on same-store or comparable-store sales.

Comparable-store sales-growth figures were available for 23 of the 27 restaurant companies for their most recently reported fiscal quarters. For one of the companies, McDonald's Corp. (MCD), we had two figures - a comparable total sales-growth rate of 1.9%, and a higher growth rate of 2.5% for U.S. stores. For all the other companies in this smaller set of 23, one or the other growth rate was available, or they matched, if both were available.

It turns out that only 10 publicly listed U.S. restaurant companies reported increased comparable-store sales from a year earlier, for their most recent fiscal quarters.

Here they are, sorted by the comparable-store sales-growth rate, with gross profit margins and operating margins shown.

   Company                       Ticker   Comparable-store sales change  Gross margin, most recent quarter  Gross margin, year-earlier quarter  Operating margin, most recent quarter  Operating margin, year-earlier quarter 
   Wingstop Inc.                  WING                            21.6%                              83.1%                               81.9%                                  31.7%                                   26.4% 
   Domino's Pizza Inc.            DPZ                              8.5%                              38.9%                               37.6%                                  21.3%                                   19.1% 
   Texas Roadhouse Inc.           TXRH                             8.4%                              14.7%                               13.3%                                  13.8%                                   12.1% 
   Chipotle Mexican Grill Inc.    CMG                              7.0%                              24.4%                               22.4%                                  19.9%                                   19.4% 
   Sweetgreen Inc. Class A         SG                              5.0%                               7.7%                                3.1%                                  -5.3%                                  -14.4% 
   Brinker International Inc.     EAT                              3.3%                              11.2%                               10.3%                                  10.9%                                   10.4% 
   Kura Sushi USA Inc. Class A    KRUS                             3.0%                              11.3%                               13.8%                                   1.9%                                    4.0% 
   Cava Group Inc.                CAVA                             2.3%                              18.5%                               18.6%                                  12.2%                                   10.6% 
   McDonald's Corp.               MCD                              1.9%                              55.2%                               55.6%                                  52.2%                                   53.7% 
   Shake Shack Inc. Class A       SHAK                             1.6%                              13.3%                               12.6%                                  10.1%                                    9.0% 
                                                                                                                                                                                                              Source: FactSet 

We used gross and operating margins as criteria for this screen of S&P 500 earnings-season winners last month. For the restaurants, we are showing the profit margins, even if they have narrowed.

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06-10-24 1300ET

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