Restaurant stocks are on deck to report first-quarter results, and Stifel compiled a list of its top five bullish and bearish ideas in the sector based on a survey of the firm's consumer-focused investors.
The Analyst
Stifel's Chris O'Cull.
The Thesis
Among the survey respondents, McDonald's Corporation MCD and Restaurant Brands International Inc QSR were named as top large-cap ideas ahead of the print. Domino's Pizza, Inc. DPZ was crowned the top mid-cap idea and Wingstop Inc WING ranked as the top small-cap pick.
Yum! Brands, Inc. YUM and Chipotle Mexican Grill, Inc. CMG were the most negatively skewed large-cap stocks, the analyst O'Cull said. Among mid-cap picks, Shake Shack Inc SHAK and Red Robin Gourmet Burgers, Inc. RRGB were the top bearish ideas.
Here's a takeaway of what Stifel expects among the top picks under its coverage. Note: the firm does not cover Restaurant Brands and Shake Shack.
McDonald's
The sentiment is "more bullish" than McDonald's actual fundamentals, as same-store sales of 3 percent won't be enough to offset wage inflation and labor investments, O'Cull said.
McDonald's may have benefited from favorable foreign exchange rates, which could result in upside to the Street's EPS estimate of $1.67, he said.
McDonald's might find it difficult to move customers off low-price items to boost margins in the longer term, according to Stifel.
At the same time, the fast food chain might need to "double down" on low-priced items to sustain 3-percent comp growth in 2018, O'Cull said.
The analyst maintained a Hold on McDonald's stock with a price target lowered from $172 to $165.
Domino's
Domino's dominant position as a leader in pizza delivery is a bullish sign, as consumers continued to opt for pizza delivery options in the quarter, O'Cull said, adding that third-party delivery platforms aren't a threat to Domino's.
High expectations heading into the print could "dampen the stock's reaction" even if the numbers come in well, the analyst said.
Domino's should report same-store sales that are at least in-line with the 5.5 percent the Street is looking for, he said.
The analyst maintained a Buy on Domino's Pizza's stock with a price target lifted from $240 to $255.
Wingstop
An uptick in national advertising campaigns, expectations for higher-ticket digital orders and lower chicken wing prices makes Wingstop a top small-cap pick for the quarter, according to Stifel.
A 30-percent year-to-date gain in Wingstop's stock implies the positive expectations are "largely reflected" in the stock, O'Cull said.
Nevertheless, the case for further upside throughout 2018 can be made, but the analyst said he's hard pressed to "recommend aggressive buying" ahead of the print.
The analyst maintained a Buy rating on Wingstop's stock with a price target lifted from $50 to $56.
Yum Brands
Expectations are calling for KFC's same-store sales to fall short of the Street's 2.8-percent estimate.
The stock is trading at a premium valuation versus other highly-franchised restaurant stocks, O'Cull said.
Weaker-than-expected performance in KFC in one quarter doesn't change longer-term expectations of 15-percent EPS growth after 2019, he said.
Stifel maintained a Buy on Yum Brands' stock with a price target lifted from $92 to $94.
Chipotle
Chipotle is expected to report an EPS miss versus the Street's $1.58 estimate.
The company could get a "hall pass," as recently appointed CEO Brian Niccol is only 10 weeks into his new job, O'Cull said.
Niccol is nevertheless expected to detail some high-level strategies to stimulate traffic, the analyst said.
Stifel maintained a Hold on Chipotle's stock with an unchanged $275 price target.
Red Robin
Investors are expecting Red Robin to report an in-line EPS of 75 cents.
Upside in the quarter could come from better-than-expected same-store sales and labor cost savings, O'Cull said.
The company's momentum in the past few quarters could be sustainable, but investors need to see more evidence in the quarter, the analyst said.
Stifel maintained a Hold on Red Robin's stock with a price target lifted from $60 to $65.
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