Baird recommends restaurant exposure, outlines top picks in busy earnings season
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Baird is bullish on a number of restaurant stocks in its roundup of earnings results and previews of those still ahead.
Despite a solid earnings result and significant rise in revenue from Restaurant Brands International (QSR) on Tuesday, much of the restaurant sector is falling in afternoon trading. Nonetheless, Baird analyst David Tarantino is advising investors to add positions in many prominent names.
âWe still believe some exposure to the sector is warranted when considering that many restaurant business models contain attributes that should be considered attractive in the current market backdrop,â he wrote.
Tarantino added that durable income from franchised restaurants should serve to protect portfolios while courting less volatility overall than other consumer discretionary sectors. Meanwhile, his teamâs surveys were cited as being indicative of improved casual dining trends. The report expects this growth to be resilient to macroeconomic fluctuations as well. 
Still, he advised that investors remain selective in building out exposure as recent earnings results from major operators like Chipotle Mexican Grill (CMG), Restaurant Brands International (QSR), McDonald's Corporation (MCD), and Dominoâs Pizza (DPZ) have been somewhat scattershot.
âThe company we believe is most likely to have a "beat and raise" update is [Texas Roadhouse] (NASDAQ:TXRH),â Tarantino wrote. âBased on our conversations with investors, the most controversial names that could experience outsized volatility surrounding these reports are [Starbucks] (NASDAQ:SBUX)â¦ and [Wingstop] (WING).â
Tarantino explained that Starbucks (SBUX) results might be noisy as the coffee chain deals with significant issues in employee compensation and unionization. Meanwhile, Wingstop (WING) is suspected to come up short of âextremely toughâ year over year comparisons.
The firm retained âOutperformâ ratings on Chipotle (CMG
-1.5%), Yum Brands (YUM
-0.7%), McDonalds (MCD
-0.3%), Dominoâs Pizza (DPZ
-2.0%), Dutch Bros. (BROS
-3.9%), Darden Restaurants (DRI
-1.6%), Wingstop (WING
-2.2%), and Portilloâs (PTLO
-6.7%).
The franchised business models of the above names alongside comparatively low sensitivity to inflation make the names attractive. For the names with lower franchise rates that temper the thesis, the report suggests that pricing power is enough to overcome cost concerns. Chipotle and Darden were cited as key examples of the latter dynamic. 
Meanwhile, âNeutralâ ratings were assigned to Restaurant Brands (QSR
-2.9%), Starbucks (SBUX
-1.7%), El Pollo Loco (LOCO
+1.4%), Texas Roadhouse (TXRH
-2.1%), Shake Shack (SHAK), Chuyâs Holdings (CHUY
-2.2%), BJâs Restaurants (BJRI
-4.8%) , Cheesecake Factory (CAKE
-3.5%), and Jack in the Box (JACK
-1.2%).
Tarantino explained that valuation concerns are motivating the overall cautious take, with lessened relative resilience as compared to the group of stocks designated âOutperform.â The second group was also anticipated to be more sensitive to economic swings.
Still, Texas Roadhouse (TXRH) was touted as a favorite and âthe most likely to beat and raiseâ on earnings. Earnings are expected from the chain on Thursday evening after the close. 
Elsewhere, the Baird team was broadly cautious. 
âEven if sales performance surprises the upside, we highlight risk that escalating cost
issues (particularly commodities) could cause profit performance to come in weaker than estimates and prompt downward EPS estimate revisions for 2022,â the report reads. âThe two exceptions thus far have been [McDonaldâs] (MCD) [which is a] highly franchised model that has low direct exposure to inflation and [Chipotle] (CMG) [that reported] impressive top-line strength and pricing power helping to overcome inflation.â
Earnings reports still ahead this week are as follows:

May 3 (Post-Market): Starbucks (SBUX), Yum China (YUMC)
May 4 (Pre-Market): El Pollo Loco Holdings (LOCO), Yum Brands (YUM), Wingstop (WING)
May 5 (Pre-Market): Portilloâs (PTLO)
May 5 (Post-Market): Chuyâs (CHUY), Texas Roadhouse (TXRH), Shake Shack (SHAK)

Read more what Citi is watching for restaurant earnings.