Restaurants, like any other retail stock, are dependent on a reasonably strong and healthy consumer. The gradual improvement in the job picture and the economy may bode well for the sector. While restaurant stocks are currently expensive on most measures, including forward price-to-earnings ratios and relative multiples, many companies are still underlevered, perhaps providing ongoing cash flow support via higher dividends and buybacks.
In a new report, Deutsche Bank A.G (NYSE: DB) points out that despite generally sluggish same-store sales and traffic, especially in the first quarter, as well as limited unit expansion potential for many brands, they believe that the cash flow generation of these businesses has been a key support for stock prices, helping offset low organic growth for many companies. Their research screened for stocks that possess the best combination of stable, cash-rich businesses and relatively low leverage.
Here are their top restaurant stocks to buy now.
Panera Bread Co. (NASDAQ: PNRA) is the top stock to buy at Deutsche Bank. More than a bakery, the popular eatery has become a go-to destination for lunch and dinner, which is raising the average check amount. Deutsche Bank has a $200 price target, which was just raised from $190. The Thomson/First Call estimate is also $200.
McDonald’s Corp. (NYSE: MCD) is a mega-cap blue chip on the list. The iconic fast-food restaurant recently has made menu changes to appeal to more health conscience customers. Deutsche Bank has a $110 price target, while the consensus is $108. Investors are also paid a tasty 3.10% dividend.
Buffalo Wild Wings Inc. (NASDAQ: BWLD) sure seems packed every Saturday and Sunday during the football season. Using the strip-mall location theme has worked big and help to drive earnings. Deutsche Bank has placed a $106 target on the stock. The consensus estimate is $100.
Del Frisco’s Restaurant Group Inc. (NASDAQ: DFRG) is a stock to buy for investors that want to own a high-dollar steakhouse. The company operates approximately 34 restaurants, including 10 Del Frisco’s Double Eagle Steak House restaurants, 19 Sullivan’s Steakhouse restaurants, and five Del Frisco’s Grille restaurants in 19 states. Deutsche Bank’s $20 price target is in line with the consensus estimate.
Starbucks Corp. (NASDAQ: SBUX) rounds out the top five restaurant stock to buy. Starbucks recently announced plans to deliver the Keurig system and Starbucks-branded K-Cups to its strongest and fastest growing international markets such as China, Mexico and India, leveraging Starbucks’ popularity in those markets. Deutsche Bank has a $66 price target for the industry giant, which is the same as the consensus target. Investors receive a 1.30% dividend.
We have cautioned investors about going “all-in” on stocks at this level of the markets. It may make sense when investing in any of the Deutsche Bank restaurant stocks to scale in money. Another strategy would be to buy a half position now, and wait for a pullback to add the rest.