Restaurant check: Chipotle, Dutch Bros, Sweetgreen are the favorites at Cowen
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Cowen named its favorite restaurants stocks after taking a deep dive into the sector.
The firm warned that even with improved labor developments, input costs will be broadly challenged by surging oil prices as soft commodity prices typically follow oil. A side effect of higher gas prices is that consumers' disposable income also take a hit. Higher freight and labor costs are also a margin headwind.
"With commodity prices unlikely to abate for the foreseeable future, and the industry already running 6.8% price, the highest level of price in the last 40 years, our previous thought around a 2H weighted year for the group is increasingly pushed out to 2023," noted analyst Andrew Charles.
Charles and team think the way for investors to play the restaurant sector is to focus on chains that have medium-term focused margin stories that resonate with investors. This includes Chipotle's (NYSE:CMG) target for +27%+ margins and Starbucks' (NASDAQ:SBUX) target for operating margins of 18% to 19% in 2024. The ability for management teams to reinforce and enhance the medium term outlook is said to be key during the challenging Q1 earnings season.
An underrated positive factor for publicly-traded restaurants stocks is that the group exited 2021 with development guidance higher than anticipated. That appears to be linked in part to the large number of independent closures during the multi-year pandemic period.
Factoring in it all, Chipotle (CMG) ranked first on Cowen's list of highest-conviction picks in the restaurant sector, followed by Dutch Bros (NYSE:BROS) and Sweetgreen (NYSE:SG).
The top ten list of highest-conviction pick was rounded out by Yum Brands (YUM), Starbucks (SBUX), Darden Restaurants (DRI), McDonald's (MCD), Wingstop (WING), Jack in the Box (JACK) and Domino's Pizza (DPZ). All those restaurants stocks have an Outperform rating at Cowen.
The restaurant stocks with the best YTD returns are Arcos Dorados (ARCO) +30%, Sweetgreen (SG) +21% and Potbelly (PBPB) +17%.
The sector names with the lowest valuations based on the forward price-to-earnings ratios are Brinker International (EAT) at 7.9X, Bloomin' Brands (BLMN) at 8.0X, Cheesecake Factory (CAKE) at 11.0%.
The restaurant stocks with the highest Seeking Alpha Quant Ratings are BBQ Holdings (BBQ), Arcos Dorados (ARCO) and McDonald's (MCD). See the complete ranking.