Yum! Brands is Melius’ top restaurant pick; McDonald’s and Starbucks land sell ratings

Melius Research launched coverage on the restaurant sector on Monday,

The restaurant industry was called structurally attractive, although defending traffic was noted to be harder than ever. “Over the long term, consumers have steadily shifted more food spending away from home, driven by secular trends like urban living, dual- income households, and rising demand for convenience, variety, and experiences,” highlighted analyst Jacob Aiken-Phillips

Aiken-Phillips said the firm favors companies with strong unit economics, disciplined growth, and capital allocation, and long-term brand relevance

Yum! Brands (NYSE:YUM) was named the top sector pick by Melius Research. The positive view on YUM is that it pairs global scale and capital-light, franchise-led growth with a technology platform that improves store operations and could provide alternative profit streams over time.

“Beyond operational efficiencies, the Byte by Yum! platform opens the door to potential new revenue streams, with long-term optionality to license its technology beyond its own system. Whilemacro headwinds remain, we see the portfolio’s resilience, tech-led margin expansion, andemerging platform monetization opportunities driving sustained system sales growth. Valuation remains attractive relative to this durable and increasingly diversified growth profile.”

Melius Research also issued buy ratings on Texas Roadhouse (TXRH), Dutch Bros (BROS), and Restaurant Brands International (QSR) due to strong unit economics, clear growth runways, and upside to long-term system sales. Meanwhile, Hold ratings were issued on Domino’s Pizza (DPZ), Darden Restaurants (DRI), Chipotle (CMG), Wingstop (WING), and Cava Group (CAVA), which were called great companies, although much of the long-term strength was said to be already priced in.

The firm was less positive on McDonald’s (NYSE:MCD), which was rated at Sell due to a U.S. value perception that is seen as having eroded with consumers opting for healthier, fresher meals. Melius also tagged Starbucks (NASDAQ:SBUX) with a Sell rating on the view that menu pricing has outpaced the consumer experience and a turnaround will take time to stabilize U.S. operations. Competition in China and other markets was also noted to have intensified for SBUX.