Choosy Investors Are Buying Restaurants
The Q3 earnings season is going to be an interesting time for the stock market. There is an emerging theme and which revenue and earnings are being impacted by inflation in negative ways resulting in decreases in guidance and lowered expectations. The caveat for investors is that not all sectors are feeling the impact the same so, like always, it pays to be choosy. One of the sectors that analysts are warming to in the face of the growing headwinds is the restaurant stocks. While they face many of the same pressures as other business types they're far less exposed to the global supply chain which is what is really having an impact on the outlook.
Chipotle Mexican Grill Is Red Hot
CEO Brian Niccol has been driving innovation at Chipotle Mexican Grill (NYSE: CMG) for the last couple of years. His efforts helped position the company for the pandemic before the pandemic struck and have since led it to new highs. The calendar second-quarter results not only beat the consensus expectations but accelerated to a 38% year-over-year gain and set a company record that will soon be surpassed again. Looking forward, growth is expected to continue accelerating with revenue topping $1.90 billion for the first time in the current quarter. The company is expected to report its results on October 21st and the analyst are getting bullish.
We've had six analysts come out over the past month reiterating their bullish stance and raising their price targets. They see the stock trading in a range near $2,200 compared to the Pricetarget.com consensus of $1,823 and the high price target of $2,600. Analyst John Staszak Of Argus thinks the company’s brand is strong and only getting stronger. He thinks the company's mobile platform will help the company recover as the economy reopens. Analyst Andrew Charles at Cohen cited the same factors but added Chipotle is positioned to outperform in any environment because of its digital presence. In our view, Chipotle's digital presence and move towards digital kitchens were brilliant and the key to the company's success. Without digital, Chipotle would have had a much different pandemic and investors have CEO Brian nickel to thank for it.
Dine-in Darden Restaurants Gets Lots Of Love
Darden Restaurants, Inc. (NYSE: DRI) had a fabulous calendar third quarter in which strong foot traffic at all of its brands drove strong results. The company beat on the top and the bottom line, it raised guidance, increased the dividend, and increased the share buyback allotment by three-quarters of a billion dollars. There was nothing not to like about the results and the outlook is bright if a little clouded by the COVID-19 pandemic.
No less than 15 analysts have come out in the wake of the Darden earnings report to raise their price targets. The Pricetagets.com consensus rating is a firm buy leaning towards Strong by with a price target of $167. The consensus implies roughly 5% upside is in store for the stock but does not fully reflect the recent trend in sentiment. The high price target of $180 implies 13% of upside and we think that is just the beginning of what this market could do.
Jeffries Says Dine-in Establishments Are A Buy
Jeffries came out with a blanket statement calling the dine-in category to attractive to pass up. The sector was less impacted by COVID during the summer than was expected and is set up to outperform during the Q3 reporting season. The results from Darden Restaurants give evidence to this and we agree with the sentiment. Among the names on the list is the Cheesecake Factory (NASDAQ: CAKE) which has been upgraded from Neutral to a Buy with a price target of $60.The $60 target compares to a consensus of $57 and a high price target of $70 that we think will soon be surpassed. Shares of the stock recently confirmed a bottom At the $42.50 level and appear ready to move higher.
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