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4 Stocks to Serve Better Returns Amid Restaurant Recovery

Rajashree Bhattacharyya
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After surviving the seven-quarter long tragedy of declining comps, the U.S. restaurant industry received a pleasant surprise in the fourth quarter of 2017. According to TDn2K’s The Restaurant Industry Snapshot, comps for the fourth quarter were up 0.4%, comparing favorably with the third quarter’s comps decline of 1%.

Should We Be Optimistic of Growth?

The positive momentum in sales growth in the fourth quarter was not enough to outweigh the sluggish growth of the industry in 2017. For the full year, comps declined 1.1%, the same as in 2016. Traffic for the year also fell 3.2%.

Amid declining traffic trends for the year, comps growth may have been aided by promotions and discounting strategies by restaurant managements. Over the past year, the restaurant industry’s shares have returned 14.9%, underperforming the growth of 16.2% for the S&P 500.

However, most of the restaurants are undertaking aggressive sales-building strategies to drive demand. The fourth quarter already bore the fruit of these efforts. We believe that 2018 is set to witness an overall improvement in restaurant sales given an increase in consumer discretionary spending coupled with the restaurant bigwig’s sales-improvement efforts.

Restaurant Operators Bullish About Industry Scenario

A turnover for most restaurants showed up in November 2017 and is ongoing. Moreover, according to TDn2K market research, the overall restaurant industry is starting to improve. Although not all brands may have an opportunity to rake in profits, many of the restaurants operators foresee consumer demand to rise and discretionary spending to increase in 2018.

So, with growth around the corner, investors can consider a few stocks from the space that appear to hold promises for 2018.

Picking the Right Stocks

We have taken help of the Zacks Stock Screener to zero in on restaurants stocks that project year-over-year sales growth in 2018 and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Further, we believe these stocks will show comps improvement and stellar earnings growth of more than 15% in 2018.

Let’s take a closer look at each of these stocks.

BJ's Restaurants, Inc. BJRI is known for its continued menu innovation to drive sales growth. The Zacks Consensus Estimate for company’s sales in 2018 are pegged at $1.08 billion, projecting year-over-year growth of 4.5%.

Through an array of cost-containment strategies, BJ’s Restaurants is constantly trying to improve its operating margin. The company is focusing more on its smaller prototype restaurants that cost roughly $1 million less than the prior prototype. This should help in reducing operating costs. Due to lesser food wastage and improved labor productivity, these new restaurants generate higher margins. Subsequently, earnings for 2018 is expected to grow 27% from 2017.

In six months’ time, BJ's Restaurants gained 43.6%, outperforming the industry.

The consensus estimate for Darden Restaurants. Inc.’s DRI sales in fiscal 2018 is pegged at $8.01 billion, reflecting 11.8% year-over-year growth. In addition to acquisition benefits and perks from brand-revitalization strategies, the company’s aggressive cost-management plan is expected to lead to profits. For fiscal 2018, the company, with a Zacks Rank #2, expects a 10-40 basis-point year-over-year margin expansion as a result of cost savings. Subsequently, the consensus estimate for fiscal 2018 earnings is pegged at $4.76, suggesting 18.4% year-over-year growth.

Over the last six months, the company’s shares have rallied 11.7%, outperforming the 4% growth of the industry.

Ruth's Hospitality Group, Inc. RUTH carries a Zacks Rank #2. The consensus estimate for sales and earnings for 2018 is pegged at $453 million and $1.35, mirroring 9.2% and 22.7% year-over-year growth, respectively. The company’s shares have rallied 19.4% in the past six months.

Another Zacks Rank #2 stock is Carrols Restaurant Group, Inc. TAST. Even though the company’s shares underperformed the industry in the past six months, the consensus estimate for 2018 sales is pegged at $1.15 billion, with expected growth of 6% from 2017.

Moreover, the consensus estimate for earnings in 2018 is projected at 26 cents, suggesting 30% year-over-year growth.

Pizza Giant to Consider

Meanwhile, the U.S. quick-service pizza space is growing by leaps and bounds. Domino's Pizza, Inc. DPZ is expected to become the leading pizza company in 2018, overtaking other pizza bigwigs. Even though the company carries a Zacks Rank #3 (Hold), investors should consider taking a look at this stock.

The company recently reaffirmed its three-to-five-year outlook, which hints at global retail sales growth between 8% and 12%, and domestic and international comps growth of 3% and 6%, respectively. For 2018, the consensus estimate for Domino’s earnings shows an impressive year-over-year growth of 48.5%. The company is also expected to see earnings grow at an annualized rate of 15.2% over the next three-to-five years.

Meanwhile, in six months, Domino’s shares have rallied 14.8%, outpacing the industry.

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Domino's Pizza Inc (DPZ) : Free Stock Analysis Report
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Carrols Restaurant Group, Inc. (TAST) : Free Stock Analysis Report
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