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Is it Time to Look Beyond YUM! Brands? 4 Top Restaurant Picks

Harendra Ray

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” — Warren Buffett.

This is some nice piece of advice for those on the horns of a dilemma regarding retaining YUM! Brands, Inc. YUM, which at present has nothing working in favor. The stock has lost 16.4% in the past three months, compared with the Zacks Retail-Restaurant industry’s fall of 10.3%. Year to date, the stock has gained 6.7%, compared with the industry’s rally of 16.9%. The three-month decline was primarily led by lower-than-expected results for third-quarter 2019 and weakness in the Pizza Hut U.S. division.

In third-quarter 2019, Pizza Hut U.S. sales and same-store sales declined 2% and 3%, respectively. YUM! Brands is focusing on transforming its Pizza Hut business to a modern delivery asset base in the United States. It is also restructuring as well as upgrading its franchisee base. The company believes that the choppy sales trend will continue through 2020. Moreover, the company is likely to temporarily shut down hundreds of Pizza Hut stores across the United States.

Concerns regarding the slump in Pizza Hut U.S. sales have compelled analysts to revise earnings estimates. In the past 30 days, the Zacks Consensus Estimate for 2019 and 2020 has moved down 3.6% and 1.9% to $3.73 and $4.16, respectively. Moreover, the consensus estimate for fourth-quarter 2019 has inched down 3.4% to $1.13.

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The stock performance and estimate revision trend suggest that investors should steer clear of this Zacks Rank #4 (Sell) stock for now.

Any Bright Spots in the Restaurant Space?

While the aforementioned factors have made YUM! Brands an unappetizing pick, not all players in the restaurant space are in a spot. Few have managed to keep a firm footing on digital innovation, delivery channel expansion and cost-saving efforts. Meanwhile, despite a drop in traffic, average guest check growth has been accelerating.

Here, we highlight four Retail – Restaurants stocks on the basis of their strong Zacks Rank, encouraging estimate revision and solid fundamentals.

Chipotle Mexican Grill, Inc. CMG is currently one of the best performing restaurant companies. This Zacks Rank #2 (Buy) stock has surged 77.6% year to date. The Zacks Consensus Estimate for its current and next-year EPS has climbed 1.9% and 1.3% over the past month to $13.75 and $17.62, respectively, indicating earnings growth of 51.8% and 28.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

Dunkin' Brands Group, Inc. DNKN, which develops, franchises, and licenses quick service restaurants worldwide with its subsidiaries, carries a Zacks Rank #2. So far in the year, the company’ shares have gained 18.6%. The Zacks Consensus Estimate for its current and next-year EPS has moved 2% and 0.6% north over the past 30 days to $3.12 and $3.29, respectively. This suggests year-over-year earnings growth of 7.6% in 2019 and 5.4% in 2020.

Denny's Corporation DENN owns and operates full-service restaurant chains under the Denny's brand. The Zacks Rank #2 company has gained 19.8% year to date. The Zacks Consensus Estimate for its current and next-year EPS has moved 3% and 2.7% north over the past month to 68 cents and 76 cents, respectively. Although the company’s earnings in the current year are likely to be flat year over year, the metric is expected to grow 12.7% in 2020.

Chuy's Holdings, Inc. CHUY, which owns and operates full-service restaurants, has a Zacks Rank #1. Shares of the company have gained 49.6% year to date. In the past 30 days, earnings estimates for the current and next year have moved up 4.2% and 4.8% to 99 cents and $1.09, respectively. This calls for year-over-year earnings growth of 12.5% in 2019 and 9.4% in 2020.

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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
 
Denny's Corporation (DENN) : Free Stock Analysis Report
 
Yum! Brands, Inc. (YUM) : Free Stock Analysis Report
 
Chuy's Holdings, Inc. (CHUY) : Free Stock Analysis Report
 
Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report
 
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