Restaurant outlook: Employment trends and lower interest rates present opportunities
Contributor since / Followers
JHVEPhoto
Softer employment trends translating into lower turnover, coupled with declining interest rates present opportunities in the restaurant and foodservice industry, says J.P. Morgan analysts, as dividend yields and increased focus on digital ordering favors names in the category.
Wendy’s (NASDAQ:WEN) is an “underappreciated story for its continuing 6% dividend yield,” J.P. Morgan’s analyst team led by John Ivankoe says. And while small cap income isn’t a highly sought-after sector, the dividend yield for Wendy’s (WEN) is protected though straight free cash flow as well as more than $500M in excess cash on the company’s balance sheet.
“We have said in previous research that Wendy’s is too cheap to ignore – an opinion we hold today as well,” Ivankoe and team said in Monday’s report.
The same applies to McDonald’s (NYSE:MCD), Dominos (NYSE:DPZ), and Yum Brands (NYSE:YUM), which J.P. Morgan labels as “safe to own” stocks among yield-based stocks. While ratings vary from Neutral (DPZ and YUM) to Overweight (MCD), brand diversity, pivot to a more attractive value message, and solid comparable store sales should insulate these names from lower consumer spending trends and higher-than-expected commodity cost pressures.
Ivankoe recommends investors take profits on Starbucks (NASDAQ:SBUX) following the 36% price appreciation from the July 16 low following the new CEO announcement, as “so much needs to be done to allow Starbucks to return to being Starbucks,” in the eyes of partners and customers. Shares are down more than 2% on Monday.
Among growth stocks, Ivankoe prefers Dutch Bros (NYSE:BROS) as “the best Overweight-rated” idea. A serious focus on only opening new units with strong economics, as opposed to chasing a growth rate – is matched with more efficient marketing spend and the successful rollout of mobile ordering. After a significant set-back on FY guidance, the stock has made a steady recovery with a 27% gain from the post-Q2 low.