Markets

McDonald's, Starbucks & 2 Other Restaurant Stocks to Bank On

While McDonald's CorporationMCD is known for its hamburgers and fries, Starbucks CorporationSBUX is almost synonymous with coffee and lattes. However, as it stands now, both have entered into each others field of offerings. While Starbucks is selling breakfast and lunch items along with its signature coffee, McDonald's is strengthening its beverage offerings through McCafes.

Head to Head

McDonald's' earnings have beaten the Zacks Consensus Estimate for five consecutive quarters (average positive earnings surprise of 4.78% over the trailing four quarters) while revenues have surpassed the same in two consecutive quarters. After reporting sluggish comps for a while, this Zacks Rank#2 (Buy) company driven by solid comps at all its segments. Meanwhile, the company stated that it expects comps to be positive in all segments in the fourth quarter also.

Despite currency headwinds, McDonald's earnings per share of $1.40 grew 28% year over year. Meanwhile, in constant currencies, it grew 44% on a year-over-year basis owing to a decline in total costs and expenses and lower share count. Though revenues of $6.62 billion declined 5% year over year due to currency headwinds, it grew 7% year over year in constant currencies driven by comps growth at all its segments. Global comps grew 4% that compared favorably with 0.7% decline in the prior quarter.

After declining for two consecutive years, U.S comps grew 0.9%. While comps at International Lead Markets segment grew 4.6% driven by strong performance in Australia, the U.K. and Canada and positive results in Germany, it grew 8.9% in High Growth Markets driven by strong comps in China and other markets. (Read: McDonald's Q3 Earnings Beat, Comps Up; Fx Issues Persist )

The overall upside reflects the effects of the turnaround plan announced by Steve Easterbrook - its Chief Executive Officer - in May 2015. It seems that the company has started to reap the benefits of its efforts to return to positive comps. The company is focusing on product innovation, offering a value menu and rolling out more limited-time offerings.

Also, the company is working on trimming complicated menus to speed up service and focusing on order accuracy through new operational procedures and training programs. All these are expected to help the company achieve expected results. Going forward, the roll out of the all day breakfast done in October is expected to boost traffic. Year-to-date, share price of the company has increased approximately 23%, far better than S&P's growth of approximately 2%.

On the other hand, barring the last reported quarter, Starbucks' earnings have not missed the Zacks Consensus Estimate since the beginning of 2014 and the company has an average positive earnings surprise of 2.44% over the trailing four quarters. Meanwhile, revenues have been beating the consensus mark consistently over the trailing four quarters.

In its fiscal fourth quarter, adjusted earnings of 43 cents per share grew 16% year over year and came in higher than management's guidance driven by solid top-line growth but offset by lower margins. Meanwhile, total sales of $4.91 billion increased 18% year over year and beat the consensus mark by 0.5% driven by robust comps.

Comps grew 8%, higher than a 7% rise in the previous quarter, driven by increased traffic trends. Higher food/beverage sales, strong comps in the U.S. and Europe and incremental revenues from Starbucks Japan primarily drove sales. (Read: Starbucks Lags Q4 Earnings; Rise in US Traffic Drives Sales )

We would like to remind investors that sales growth at this coffee giant has been exceptional over the past two quarters driven by solid global traffic trends. Shares of this Zacks Rank #2 stock have had a good run this calendar year, gaining approximately 54% year-to-date compared to S&P's growth of approximately 2%. With a market cap of almost $83 billion, the Seattle, WA-based coffee chain is gaining momentum from its extensive global retail footprint, successful innovations, best-in-class loyalty program, digital offerings and rapid growth in the international markets.

We believe continued strong top-line performance backed by a range of sales drivers and various cost saving initiatives should boost earnings, going ahead. Starbucks' digital efforts like Mobile Order & Pay and delivery services, new third-party loyalty partnerships, food and beverage innovation, better food attachment, Starbucks Reserve premium coffees and Teavana tea should fuel sales in fiscal 2016.

Starbucks and McDonald's are both interesting options for investors right now. However, given the flourishing restaurant industry, we believe that these industry darlings are not the only ones with strong growth prospects.

Two Other Stocks to Buy Now on Strong Fundamentals

Based in Orlando, FL, Darden Restaurants, Inc. 's DRI is one of the largest casual dining restaurant operators worldwide. This Zacks Rank #1 (Strong Buy) company's earnings have beaten the Zacks Consensus Estimate consistently over the past four quarters. Positive comps growth and costs saving initiatives aided the upside.

The strong growth has been backed by focus on core menu, sound marketing strategy, its customer relationship management, digital advertising and a strong promotional pipeline. Moreover, the company's Olive Garden Brand Renaissance plan that includes simplifying kitchen systems, developing new core menu items, updating its online-ordering platform and revamping its restaurant design have been growth catalysts.

In its fiscal first quarter 2016, reported in September, adjusted earnings per share came in at 68 cents per share, up more than 100% on a year-over-year basis driven by cost cuts, higher revenues, positive comps and lower interest expenses. Total revenue of $1.69 billion increased 5.7% year over year.

The upside reflects revenues from new restaurants and comps growth at all its segments. EBIT margins improved on a year-over-year basis on the back of the company's cost saving initiatives and lower discounting at Olive Garden. Given the solid performance, the company increased its earnings guidance for fiscal 2016. Year-to-date, share price of the company has increased 11%.

Based in Oklahoma City, OK, Sonic Corp.SONC is a chain of quick-service drive-in restaurants in the U.S. The company's earnings have beaten the Zacks Consensus Estimate in three of the trailing four quarters with an average positive earnings surprise of 5.13%. The company posted better-than-expected fiscal fourth quarter 2015 earnings on Oct 19. Adjusted earnings of 43 cents per share beat the Zacks Consensus Estimate by approximately 2.4% and grew 26.5% year over year. Revenues improved 7% year over year.

During fiscal 2015, system same-store sales grew 7.3%, marking the fifth consecutive fiscal of positive same-store sales growth. Backed by product innovation and promotional, media and technology initiatives, the company intends to continue to record positive same-store sales and earnings growth. This Zacks Rank #2 company now expects earnings to grow in the range of 16% to 20% compared with the previous expectation of 14% to 18% for fiscal 2016. Share price of the company is up 7% year-to-date.

What Else Is Driving These Companies?

Apart from strong fundamentals, a favorable operating environment has also helped the companies to post better results. The restaurant industry has done well in 2015 so far backed by an improving economy and the resultant increase in consumer spending power. Also, an overall favorable macro backdrop, characterized by a steadily improving labor market, stable energy costs and rising consumer confidence, inspires investors' optimism.

On the metrics front, despite a marginal monthly decline, the Restaurant Performance Index (RPI) that tracks the health and outlook for U.S. restaurants came in above 100 for the month of September, for the 31st consecutive month, according to the National Restaurant Association. Meanwhile, same-store sales for the industry went up 1.5% for the third quarter, per Black Box Intelligence. This marked the fifth consecutive quarters of positive comps.

What's Next?

Given that the third-quarter 2015's average for job gains was the lowest in the last two and a half years, market analysts expect restaurants' sales and traffic to be adversely impacted in the fourth quarter. Moreover, inclement weather during the winter months may also pose a challenge.

In such a scenario, investors are recommended to focus on stocks that have the potential to grow on strong fundamentals, overcoming the tough environment. We believe investing in the abovementioned companies would yield strong returns for your portfolio in the short term.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

SONIC CORP (SONC): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

MCDONALDS CORP (MCD): Free Stock Analysis Report

DARDEN RESTRNT (DRI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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