Big Money’s Top 5 Restaurant Stocks - InvestingChannel

Big Money’s Top 5 Restaurant Stocks

Editor’s Note

It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here.

Proprietary Data Insights

Financial Pros’ Top Restaurant Stock Searches in the Last Month

#1SBUXStarbucks Corp58
#2CMGChipotle Mexican Grill44
#3MCDMcDonald’s Corp39
#4DPZDomino’s Pizza Inc7
#5SHAKShake Shack Inc6
#ad Why IntelGenx Could be Your Next Investment

Should You Hold Starbucks (SBUX)?

Starbucks (SBUX) surprised investors when it said same store sales declined last quarter for the first time since the pandemic.

This was a rare miss for a company that’s steadily grown ~10% every year.

But it could have been worse…

Comparable transactions were down 22%, partially offset by a 10% increase in average ticket price.

Unsurprisingly, traders hammered the stock and have yet to let up.

However, the stock is now trading at a historically low valuation.

So, is it worth keeping in your portfolio?

Starbucks’ Business

The Seattle coffee chain set the standard for mass caffeine brewing.

People used to joke there were so many Starbucks, you could leave one and find yourself staring at another across the street.

Today, the company is a global restaurant behemoth serving coffee and food to the masses with more than 18,000 stores in the U.S. and over 20,000 internationally.

Starbucks reports its business along those same lines, with the U.S. accounting for 78% of total sales.


Source: Starbucks Investor Relations

Most stores are owned and operated, though a small chunk are franchised.

The latest earnings call didn’t inspire much confidence as management forecast negative growth for the remainder of the year.

However, new store growth should help boost overall revenues. 



Source: Stock Analysis

Starbucks is one of the most consistent restaurants stocks we’ve covered, with margins holding relatively steady over time.

The one knock we see is the large debt increase in 2020, when total debt jumped from $11 billion to $25 billion. It has yet to pay that down.

However, that debt is only costing them around $200 million extra annually.

So, it makes sense they’d put more money towards their 3% dividend and share buybacks.



Source: Seeking Alpha

Relative to its peers, Starbucks trades at just 13x operating cash flow, almost half that of McDonald’s (MCD), which didn’t have such a great quarter either.

However, forecasts put Starbucks at 18x forward cash flow, which isn’t so hot.

It’s also interesting to see its price-to-sales down at 2.3x, 40% lower than its 5-year average.



Source: Seeking Alpha

Suffice to say, Starbucks’ slowdown is unusual. Typically, the company consistently grows sales every year.

And lately, it’s been able to do so while keeping margins steady.

That’s driven higher profitability and greater cash flow.



Source: Seeking Alpha

It’s interesting to see Starbucks run one of the lowest gross margins of the group.

Chipotle Mexican Grill (CMG), for example, is over 40%.

However, Starbucks has the second best free cash flow margins next to McDonald’s.


Our Opinion 9/10

We believe the latest pullback in Starbucks creates a buying opportunity.

While sales could slide further in the coming quarters, growth should resume within the next 12-18 months.

So for a patient investor, this slow drip is worth the wait.

Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here

Related posts

Advisors in Focus- January 6, 2021

Gavin Maguire

Advisors in Focus- February 15, 2021

Gavin Maguire

Advisors in Focus- February 22, 2021

Gavin Maguire

Advisors in Focus- February 28, 2021

Gavin Maguire

Advisors in Focus- March 18, 2021

Gavin Maguire

Advisors in Focus- March 21, 2021

Gavin Maguire