Analysts highlight the qualities of these 3 companies in the foodservice sector
If you're looking for interesting investment opportunities in the restaurant sector, analysts recommend focusing on stocks of three restaurants that can bring long-term gains to your portfolio.
We all love delicious food. But few people know that the food and beverage industry can also yield profitable investments. Restaurants with good reputations that offer delicious and affordable food can be solid growth stocks that deserve a place in your portfolio. With gradual price adjustments and plans for international expansion, such companies can become globally recognized brands.
The key to achieving these enticing returns is patience. Restaurants are physical places that take time to build and require time to become profitable.
Chipotle Mexican Grill $CMG+1.8%
Chipotle Mexican Grill (CMG) owns a chain of restaurants serving Mexican food with nearly 3,500 locations in the U.S., Canada and Europe as of June 30, 2024. Chipotle's stock price has nearly quadrupled over the past decade, and shareholders recently approved a historic 50-to-1 stock split, with shares beginning trading after the split on June 26.
There's good reason for the stock's strong performance, which is seen in the increase in revenue and net income from 2021 to 2023 as the company slowly expanded its presence by opening new locations. Total revenue rose from $7.5 billion in 2021 to $9.9 billion in 2023, while net profit nearly doubled from $653 million to $1.23 billion over the same period.
The business also generated an average positive free cash flow of US$969 million over the three years. Net restaurant openings were 200 to 300 per year, and the number of Chipotle stores grew from 2,768 at the start of 2021 to 3,437 by the end of 2023.
This company performance continued through the first half of 2024. Revenue grew 16.2% year-over-year to $5.7 billion, while operating profit rose 28.5% to $1 billion. Net income improved 28.7% to $815 million as the Mexican restaurant chain posted positive comparable restaurant sales of 11.1% for the quarter.
The good news is that Chipotle continued to generate healthy positive free cash flow of $858.6 million for the half, up 10% year-over-year compared to $780 million in the prior year. A total of 99 new stores were opened in H1 2024, 89 of which featured Chipotlane, which allows customers to pick up their digital orders directly from their cars.
Texas Roadhouse $TXRH+5.8%
Texas Roadhouse (TXRH) owns a chain of restaurants that serve American food such as beef steaks, pork chops, chicken, fries and cocktails. The company's corporate strategy is based on serving quality, freshly prepared food coupled with excellent service.
This emphasis has allowed the company to grow steadily over the years, a testament to Texas Roadhouse's strong reputation and recognizable brand. From 2021 to 2023, revenue grew from $3.5 billion to $4.6 billion, while net income increased from $245.3 million to $304.9 million. Texas Roadhouse also generates consistent free cash flow with an average of $250 million per year.
Like Chipotle, Texas Roadhouse's results for the first half of 2024 continued its strong performance. Revenue grew 13.5% year-over-year to $2.7 billion, while operating profit grew 40.5% to $275.9 million. Net income grew 38.4% to $233.3 million. The business opened 15 company-owned restaurants and six franchise restaurants during the half-year and posted comparable restaurant sales growth of 8.9% and 8% in company-owned and franchise restaurants, respectively.
Free cash flow is also growing, with a 66% year-over-year increase from $133.7 million to $221.9 million. Higher free cash flow helped boost dividends paid from $1.10 in the first half of 2023 to $1.22 in the first six months of the year. Management believes it can continue to grow by serving delicious food and excellent service to its customers. Texas Roadhouse also plans to increase prices on its menu and expects positive comparable restaurant sales for 2024.
Wingstop $WING+2.1%
Wingstop Inc.
WINGWingstop (WING) offers a wide variety of classic wings, tenders and chicken sandwiches served in 11 different flavors. The company franchises most of its restaurants worldwide and had approximately 2,279 locations as of March 30, 2024.
This chicken wing specialist has seen impressive growth over the years as it has enjoyed growth in both the top and bottom line. Revenue has grown from $282.5 million in 2021 to $460 million in 2023. Net income has increased from $42.7 million to $70.2 million over the same period. Free cash flow also grew steadily, from US$20.9 million in 2021 to US$80.8 million in 2023.
During these three years, Wingstop increased its number of international branches from 1,731 to 2,214 by opening 200 to 300 new branches per year. The company tripled its quarterly dividend from $0.07 in 2017 to $0.22 in the most recent quarter and also paid several special dividends.
Wingstop's momentum continued in the first quarter of 2024. Revenues for the period rose 34% year-over-year to $145.8 million, while operating profit rose 66.5% to $42.7 million. Net income rose 83.5% to $28.7 million.
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