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What are we looking for?

Restaurant companies with attractive gross profit margins and high analyst sentiment.

The screen

As pandemic restrictions loosen on in-house dining, both in Canada and the United States, we thought it a good opportunity to review investment potential within the restaurant industry. Today our focus is on U.S.-listed names, using two key measures.

  • First, we screen for restaurant companies with a market capitalization of more than US$4-billion.
  • Next, we screen for companies with a StarMine analyst revisions model (ARM) score of 60 or higher. The ARM score is a percentile (1-100) ranking of stocks based on changes in analyst sentiment. The model looks at changes to analysts’ estimates of earnings; revenue; and earnings before interest, taxes, depreciation and amortization (EBITDA); as well as changes in the buy/hold/sell recommendations of those analysts. ARM is highly predictive of stock price movement.
  • Lastly, we screen for companies with a gross profit margin of 20 per cent or higher over the past 12 months. The metric is used to evaluate a company’s financial health by calculating the amount of money left over after subtracting the cost of goods sold (COGS) from revenue. Restaurant companies that can maintain a higher gross profit margin demonstrate they can retain income even as food prices and other expenses increase during a period of rising inflation.

More about Refinitiv

Refinitiv, a London Stock Exchange Group business is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges, and scale intelligently.

What we found

U.S. restaurant stocks

CompanyTickerMkt. Cap. (US$ Mil.)ARM Score"Div. Yld. (%)""Gross Profit Mgn.(LTM)"1Y Ttl. Rtn.Recent Close (US$)
Papa John's Int'l Inc.PZZA-Q4,536.1800.830.062.1124.06
Wingstop Inc.WING-Q5,041.9760.478.738.1169.50
Yum Brands Inc.YUM-N37,384.5751.649.132.3126.45
Wendy's Co.WEN-Q4,932.5741.953.8-6.222.14
Starbucks Corp.SBUX-Q133,674.6741.726.331.6113.37
Texas Roadhouse Inc.TXRH-Q6,365.0711.363.626.691.15
McDonald's Corp.MCD-N180,919.5692.254.79.7242.26

Source: Refinitiv

The screen, ranked by StarMine’s analyst revisions model scores produced seven companies. Here are two to highlight:

Atlanta-based Papa John’s International Inc. scored the highest on the list with an analyst revisions model score of 80. It operates and franchises pizza delivery and carryout restaurants, as well as dine-in restaurants in some markets. The restaurant chain, with more than 5,000 locations internationally, has performed well, with a total return of 62.1 per cent over the past year. The company has accelerated development during the pandemic, opening 123 stores during the first half of 2021, a company record, and aiming for 260 new stores by the end of the year. While Papa John’s generated one of the lowest gross profit margins of the list, at 30 per cent, it was the only company to consistently increase that measure over the past three years, by at least 5 per cent a year (not shown).

Addison, Tex.-based Wingstop Inc., has the second-highest analyst revisions model score (76). The franchisor and operator of restaurants specializes in cooked-to-order, “hand sauced-and-tossed” chicken wings. The company has seen some impressive expansion numbers during the pandemic, including 11-per-cent growth in locations in 2020 – similar to expansion figures in 2019. Wingstop’s gross profit margin number is the highest on the list, at 78.7 per cent.

Out of 23 analysts who currently cover the stock, there are six strong buys and eight buys, according to Refinitiv. The remaining nine analysts, however, have set their recommendation status to hold. Such a high number of holds signals it might be advantageous for investors to wait until Wingstop’s future prospects become more clear.

Investors are advised to do their own research before trading in any of the securities shown.

Erik Foo, CFA, is a proposition sales specialist at Refinitiv, covering research and portfolio management sales.

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