Market Overview

McDonald's, Restaurant Brands, Chipotle Are Morgan Stanley's Top Restaurant Picks In Challenging Year For Sector

Share:
McDonald's, Restaurant Brands, Chipotle Are Morgan Stanley's Top Restaurant Picks In Challenging Year For Sector
Related MCD
Alphabet, McDonald's, Netflix, Xilinx: 'Fast Money' Picks For January 16
Benzinga's Bulls & Bears Of The Week: Delta Air, McDonald's, Netflix, Nokia, Tesla And More
Related QSR
Raymond James: Pier 1 May Be 'Beyond Saving'
Analysts Weigh In On Wendy's Quarter, Sales Decline

As the economic expansion ages and macroeconomic fundamentals begin to deteriorate, one sector that is likely to find the going tough is the consumer discretionary sector. This year presents a complicated backdrop for restaurant investing, according to Morgan Stanley said.

The Analyst

Analyst John Glass named Mcdonald's Corp (NYSE: MCD), Restaurant Brands International Inc (NYSE: QSR) and Chipotle Mexican Grill, Inc. (NYSE: CMG) as his top ideas in the space.

Morgan Stanley's ratings and price targets for restaurant stocks in its coverage universe are as follows:

  • McDonald's: Overweight/$210 price target. 
  • Restaurant Brands: Overweight/$70 price target. 
  • Chipotle: Overweight/$600 price target. 
  • BJ's Restaurants, Inc. (NASDAQ: BJRI): Equal-weight/price target lowered from $63 to $60.
  • Bloomin' Brands Inc (NASDAQ: BLMN): Equal-weight/price target increased from $19 to $20.
  • Red Robin Gourmet Burgers, Inc. (NASDAQ: RRGB): Equal-weight/price target reduced from $38 to $35.
  • Starbucks Corporation (NASDAQ: SBUX): Equal-weight/price target increased from $64 to $70.
  • Wendys Co (NASDAQ: WEN): Equal-weight/price target trimmed from $19 to $18.
  • Yum! Brands, Inc. (NYSE: YUM): Equal-weight/price target increased from $90 to $97.
  • Cheesecake Factory Inc (NASDAQ: CAKE): Equal-weight/price target lowered from $50 to $49.
  • Brinker International, Inc. (NYSE: EAT) – Underweight/price target increased from $40 to $42.

The Thesis

Prospects of moderating economic growth, lapping benefits from tax reform and the market's reframing of restaurants in the context of a later cycle makes 2019 a more challenging year for restaurant stocks, Glass said in a Thursday note. 

Even amid the tough climate, fast food presents a compelling investment opportunity relative to casual dining peers due to less cyclical risk and P&L insulation from labor inflation, the analyst said. 

Restaurant valuations compress in the later part of an economic cycle by 0.2 to 0.3 times relative to the market, Glass said — yet the compression could be offset by an expected market multiple expansion, he said. 

"All franchised" restaurants, which rely mostly on domestic unit expansion, will the see the biggest multiple compression if franchisee growth slows due to higher capital costs, wage inflation and discounting, Glass said. 

After a strong 2018, the analyst said casual diners could decelerate in 2019 amid a decline in quality or taste scores and labor cost headwinds.

McDonald's Shares Attractive 

Morgan Stanley expects McDonald's U.S. sales to outpace peers in 2019, as the benefits of the re-imagining plans become more visible and improvements are made to value and localized ads.

"Rising ROIC to new highs combined with falling capex post '20 add to appeal, while proven defensiveness (both fundamentals and stock performance) make shares attractive in current environment," the firm said.

Restaurant Brands Valuation, Growth Out-Of-Sync 

Restaurant Brands has the most dislocated valuation versus growth in the firm's franchised coverage universe, Glass said. Improving margins at Tim's, better visibility on international expansion and economics and increased investor outreach will help broaden its shareholder base, he said. 

2019 Critical For Chipotle

Chipotle is a winner due to it being in the early stage of a turnaround, with new management and plenty of top-line opportunities, Glass said. Despite the company-owned model bringing wage pressures, the analyst said he expects areas such as purchasing and labor scheduling to serve as mitigating factors.

"'19 will prove a critical year to assess the success of the initiatives/opportunities first laid out in early '18." 

Related Links:

Jefferies Bites Into Chipotle Hoping To Taste 22% Upside

Oppenheimer Turns Bearish On Chipotle: Stock Is 'Too Spicy'

Latest Ratings for MCD

DateFirmActionFromTo
Jan 2019Wells FargoMaintainsOutperformOutperform
Nov 2018Morgan StanleyUpgradesEqual-WeightOverweight
Oct 2018CitigroupMaintainsNeutralNeutral

View More Analyst Ratings for MCD
View the Latest Analyst Ratings

Posted-In: John Glass Morgan StanleyAnalyst Color Price Target Reiteration Restaurants Analyst Ratings General Best of Benzinga

 

Related Articles (BJRI + BLMN)

View Comments and Join the Discussion!

Latest Ratings

StockFirmActionPT
MDRXKeyBancUpgrades0.0
ANETNomuraUpgrades260.0
CNPRBC CapitalUpgrades34.0
FISVOppenheimerUpgrades88.0
FNDUBSUpgrades37.0
View the Latest Analytics Ratings
Don't Miss Out!
Join Our Newsletter
Subscribe to:
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
Your weekly roundup of hot topics in the exciting world of fintech.
Thank You
for registering for Benzinga’s newsletters and alerts.
• The Daily Analysts Ratings email will be received daily between 7am and 10am.
• The Market in 5 Minutes email will be received daily between 7am and 8am.
• The Fintech Focus email will be received every Friday between 2pm and 5pm.

Kevin Martin Named Chief Legal And Compliance Officer Of FreightWaves

Major Winter Storm Still On Course To Hit Several Freight Regions This Weekend