SunTrust Asks ‘Where’s the Beef?’ Try These 3 Restaurant Stocks

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One of the biggest price impacts on restaurants are increases in commodity prices, and needless to say, if the prices restaurants pay to serve you meals goes up, they are pretty sure to pass those price increases along. With most commodity prices expected to climb next year, some of the top restaurants could see their margins pressured.

A new SunTrust research report notes that one cost should remain flat or maybe even drop in 2019, and that is the price of beef. That could very well benefit the top companies, especially the major national hamburger chains. The analyst feels that the lower prices could help drive continued market share gains when the companies run value-oriented promotions.

These three stocks could benefit, and all three are rated Buy at SunTrust.

McDonald’s

The fast-food giant remains a solid pick for investors seeking dividends and a degree of safety, and its shares are down over 8% in 2018. McDonald’s Corp. (NYSE: MCD) is the world’s leading global foodservice retailer, with over 36,000 locations serving approximately 69 million customers in over 100 countries each day. More than 80% of McDonald’s restaurants worldwide are owned and operated by independent local business persons.

Second-quarter diluted earnings per share increased 12% (9% in constant currencies) year over year, reflecting $0.09 per share of strategic restructuring charges. Excluding these charges, diluted earnings per share increased 15% (12% in constant currencies), excluding $0.03 per share of prior year strategic charges.

In the United States, second-quarter comparable sales increased 2.6%, driven by growth in average check, resulting from both product mix shifts and menu price increases. Operating income for the quarter decreased 7%, primarily due to the strategic restructuring charge. Excluding this charge, operating income increased 1%, as higher franchised margin dollars were partly offset by lower company-operated margin dollars.

McDonald’s shareholders are paid a nice 2.8% dividend. The SunTrust price target for the stock is $186, and the consensus price objective is $183.46. The shares traded early Thursday at $165.95.

Wendy’s

This is another top burger chain that constantly fights for market share through promotional efforts. Wendy’s Co. (NYSE: WEN) is the third largest hamburger quick service restaurant chain. The company is trying to reinforce its historical brand positioning as a premium quick service restaurant brand through major remodels and product differentiation. Wendy’s is increasing its franchise mix and trying to restart unit growth in North America and internationally, where the brand has very little presence.

In August, the company announced it reached an agreement to sell its 12.3% ownership interest in Inspire Brands to Inspire for $450 million. The sale of the stake took many by surprise as most were expecting a possible mark-down in the valuation of the Inspire stake. While the share price benefits to the company were not massive, swapping an illiquid investment for cash does unlock value.

Wendy’s shareholders receive a 1.94% dividend. The SunTrust has a $22 price target, and the consensus figure is $20.05. The shares traded at $17.40 Thursday morning.

Carrols Restaurant Group

This under-the-radar company may be among the best value of all three stocks that look to benefit from lower beef prices. Carrols Restaurant Group Inc. (NASDAQ: TAST) is a restaurant company and Burger King franchisee in the United States. As of July 1st, 2018, the company had owned and operated 807 restaurants under the name Burger King in 16 northeastern, midwestern and southeastern states.

The company’s Burger King restaurants are located in various states, such as Illinois, Indiana, Kentucky, Maine, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Vermont, Virginia and West Virginia.

The $19 SunTrust price objective compares with the $18.30 consensus target price. The shares were last seen trading at $14.30 per share.

These three purveyors of burgers and much more could be poised for a solid rest of 2018 and 2019 as lower beef pricing could push up profits. None of three will be going out of business, as all remain popular with customers.