Restaurant Stocks Are Finally Coming Back. This One Looks Like a Good Bet.

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Recent market volatility can make anyone’s stomach queasy. Some restaurant stocks, however, might be ready to chow down on.

It’s been a tough three years for restaurants. First Covid-19 kept people from visiting their favorite eateries, while the stop-start return to normal life has kept traffic from returning to normal. And just when everything was looking up, out-of-control food inflation—combined with a shortage of delivery drivers and other staff members—has hit profit margins. Now restaurants have to contend with slowing growth and perhaps a recession, something that has caused the

S&P 500 Restaurants Subindex
to drop 17% so far this year, in line with the

S&P 500.

Yet while the fundamentals look lousy, restaurant stocks have begun showing signs of life. After spending most of the year below their 50-day moving average, they have moved solidly above that level, thanks to a 7% gain over the past month. They were led by stocks such as

Starbucks

(ticker: SBUX),

Wendy’s

(WEN), and

McDonald
’s
(MCD). Even

Domino’s Pizza

(DPZ), which dropped 1.3% after releasing disappointing earnings this past Thursday, remains solidly above its 50-day moving average.

Placer.ai, which gathers data on restaurant visits, notes that traffic at all types of restaurants has been decelerating, which makes sense given that economic growth is slowing down. Even chains with fast growth, such as McDonald’s, where visits rose 16.7% last month, and

Chipotle Mexican Grill

(CMG), where they rose by 14.6%, have seen the pace slow.

That deceleration in restaurant spending was acknowledged by Goldman Sachs analyst Jared Garber, who notes that the slowdown in economic growth is causing people to be more careful with what they spend. A recession, if one comes, would be particularly bad news for full-service restaurants. Restaurants have typically maintained their wallet share versus grocery stores even during recessions—excepting the Covid pandemic. But fast food has held up much better.

In an environment of slowing growth,

Yum! Brands

(YUM) looks particularly attractive. The owner of Kentucky Fried Chicken and Taco Bell offers cheaper food for consumers who may be looking to trade down, while also growing at a relatively fast clip. It could also get a boost from China, which is trying to reboot its economy following multiple Covid lockdowns.

Yum also looks cheap relative to McDonald’s, Garber says. Historically, Yum has traded at 1.1 times McDonald’s ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization—or EV-to-Ebitda, for short—but these days trades at a slight discount. Getting back to its historical premium would put Yum at about $135 a share, Garber writes, up 13% from Friday’s close. Garber upgraded Yum to Buy from Sell on July 18.

First, though, Yum will have to get through earnings, which are due on Aug. 3. The company is expected to report a profit of $1.10 per share, down from $1.16, on sales of $16.5 billion. Leaving Russia has been a drag, but the stock looks like it’s ready to make a run. Its shares are just below their 200-day moving average, notes MKM Partners technical analyst JC O’Hara, and a successful break above that level could see the stock targeting $134.

If it can beat earnings, expect Yum to get there sooner rather than later.

Write to Ben Levisohn at [email protected]