Restaurants are go-to meeting hubs for friends, family, and colleagues. It also feels like demand is strong as consumers always seem to be chasing the next hot place or viral fast food creation on social media. No surprise the industry has returned 7.6% over the past six months, beating the S&P 500 by 2.7 percentage points.
Nevertheless, investors must be mindful because any operational misstep or unforeseen change in preferences can kill profitability given the sector’s generally thin margins at the store level. Keeping that in mind, here is one restaurant stock boasting a durable advantage and two best left ignored.
Two Restaurant Stocks to Sell:
Krispy Kreme (DNUT)
Market Cap: $553.4 million
Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ:DNUT) is one of the most beloved and well-known fast-food chains in the world.
Why Do We Think DNUT Will Underperform?
- Earnings per share have dipped by 23% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $3.23 per share, Krispy Kreme trades at 317.1x forward P/E. If you’re considering DNUT for your portfolio, see our FREE research report to learn more.
Dine Brands (DIN)
Market Cap: $456.7 million
Operating a franchise model, Dine Brands (NYSE:DIN) is a casual restaurant chain that owns the Applebee’s and IHOP banners.
Why Do We Steer Clear of DIN?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 4 percentage points
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Dine Brands is trading at $35.97 per share, or 8x forward P/E. To fully understand why you should be careful with DIN, check out our full research report (it’s free).
One Restaurant Stock to Watch:
CAVA (CAVA)
Market Cap: $7.73 billion
Starting from a single Washington, D.C. location, CAVA (NYSE:CAVA) operates a fast-casual restaurant chain offering customizable Mediterranean-inspired dishes.
Why Does CAVA Catch Our Eye?
- Aggressive strategy of rolling out new restaurants to gobble up whitespace is prudent given its same-store sales growth
- Average same-store sales growth of 9.8% over the past two years indicates its restaurants are resonating with diners
- Notable projected revenue growth of 23.7% for the next 12 months hints at market share gains
CAVA’s stock price of $66.22 implies a valuation ratio of 107.8x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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