Markets

Starbucks & 4 Other Restaurant Stocks to Place Your Bet On

Sales growth at coffee giant, Starbucks CorporationSBUX has been exceptional over the past two quarters driven by solid global traffic trends. Profits remained strong despite a significant increase in investments. The company has an average positive earnings surprise of 0.61% over the trailing four quarters.

Shares of this Zacks Rank #2 (Buy) have had a good run this calendar year, gaining approximately 46% year-to-date compared to the S&P decline of 3%. 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 stronger sales in fiscal 2016.

Starbucks is an interesting option for investors right now. However, given the flourishing restaurant industry, we believe that Starbucks is not the only company with strong growth prospects.

State of Affairs in the Restaurant Space

The restaurant industry has done well in 2015 so far backed by an improving economy and the resultant increase in consumer spending power. We note that the second half of a year always holds more promise than the first, primarily supported by the holiday season. Also, an overall favorable macro backdrop, characterized by a steadily improving labor market, stable energy costs and rising consumer confidence, inspires investors' optimism.

These positive factors are reflected in the industry's metrics. Same-store sales for the month of August grew 1.7%, which was 0.1% better than July, per TDn2K's Black Box Intelligence. With this improvement, the industry is expected to post positive same-store sales growth for the third quarter, marking the fifth consecutive quarter of positive same-store sales. Despite the monthly decline, Restaurant Performance Index (RPI) that tracks the health and outlook for U.S. restaurants came in above 100 for the month of August, marking the 30th consecutive month, according to National Restaurant Association.

We would like to remind investors that the restaurant industry is largely driven by consumer sentiment. After improving in August, consumer confidence improved further in September. The latest gain reflects the fact that consumers have become confident about the current business and employment conditions. This has possibly led to a rise in the number of Americans choosing to dine out.

4 Other Winners in the Restaurant Industry

Besides Starbucks that has a Growth Style Score of 'A', we have picked four stocks in the restaurant industry with a Zacks Rank #1 (Strong Buy) or 2 (Buy). We further narrowed down our choices with the help of our new style score system. Our research shows that stocks with a Growth Style Score of 'A' or 'B' when combined a Zacks Rank #1 or #2 offer the best investment opportunities in the growth investing space.

Based in Ohio, Bob Evans Farms, Inc.BOBE , owns and operates full-service restaurants that offer breakfast, lunch, and dinner items. It also produces and distributes fresh, smoked, and fully cooked pork sausage, ham, and hickory-smoked bacon products as well as ready-to-eat products such as sandwiches. This Zacks Rank #1 company has a Growth Style Score of 'A'.

The company's earnings have beaten the Zacks Consensus Estimate in three of the trailing four quarters recording an average positive earnings surprise of 22.53%. The performance reflects focus on improving quality of food offerings, optimizing investments in labor to deliver a better guest experience and efforts to reduce costs. In fact, the company increased its earnings guidance for fiscal 2016 during its fiscal first quarter results reported last month. Its earnings are expected to grow 11% over the long term.

Based in Texas, Dave & Buster's Entertainment, Inc.PLAY that begun trading in Oct 2014 has posted four quarterly results so far and exceeded expectations every time. The company has an average positive earnings surprise of 33.73% for the trailing four quarters. In fact, during its second quarter earnings call last month, the company increased its comps and revenue guidance for 2015 for the second time this year. This Zacks Rank #1 company has a Growth Style Score of 'B.'

The core concept of the company is "Eat Drink Play and Watch" at one location. Its menu comprises "Fun American New Gourmet" entrées and appetizers and a full selection of non-alcoholic and alcoholic beverages. Share price of the company has soared 50% year-to-date. Its earnings are expected to grow 19.2% over the long term.

Based in San Diego, Jack in the Box Inc.JACK is one of the nation's largest hamburger chains. Based on the number of restaurants, it is the second largest quick service restaurant hamburger chain in nine of the company's top 10 major markets. This Zacks Rank #1 company has a Growth Style Score of 'A.' The company's earnings have outpaced the Zacks Consensus Estimate in all the trailing four quarters with an average positive earnings surprise of 4.02%.

Strong sales in all day parts, especially breakfast and dinner, and focus on catering options in the recent times have been key growth drivers. The company has been posting positive comps consistently over the past few quarters. Its earnings are expected to grow 16.6% over the long term.

Based in Denver, CO, Chipotle Mexican Grill Inc.CMG operates quick-casual and fresh Mexican food restaurant chains in more than 30 states throughout the United States, the District of Columbia, Ontario, Canada and the U.K. Chipotle offers a focused menu of burritos, tacos, burrito bowls and salads. The company presently has a Zacks Rank #2 and a Growth Style Score of 'B.'

The company's earnings have beaten the Zacks Consensus Estimate consistently over the past four quarters. It has an average positive earnings surprise of 4.31% for the same period. Chipotle's 'Food with Integrity' program continues to drive traffic growth. Through this initiative, the company seeks to provide better food quality by using fresh ingredients and sustainably-grown and naturally-raised products such as pork, chicken and beef. Its earnings are expected to grow 21.1% over the long term.

Bottom Line

Given the optimistic market environment and efforts of restaurant companies to bring the best to the table (right from customizing their offerings to suit consumer preference to using technology to save customers' time), we expect them to continue gaining momentum.

We believe that the abovementioned stocks with strong fundamentals and growth prospects are capable of meeting investors' expectations and yield strong returns for your portfolio in the short term.

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 >>

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

CHIPOTLE MEXICN (CMG): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

BOB EVANS FARMS (BOBE): Free Stock Analysis Report

JACK IN THE BOX (JACK): Free Stock Analysis Report

DAVE&BUSTRS ENT (PLAY): 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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