Heading into 2024, one analyst points to several small cap restaurant stocks that could be good opportunities for investors with the declining interest rate environment attractive to the restaurant sector.
The Restaurant Analyst: Small cap restaurant stocks are trading at a discount to the multiples for the Russell 2000 small cap index, according to Wedbush analyst Nick Setyan.
"A revision towards these medians implies 38% upside," Setyan said. "While small cap growth restaurants to not have meaningful historicals to refer to, we expect outperformance vs. large cap growth as well."
The analyst said the fight for transactions for quick-service restaurants could "become increasingly intense."
"QSR and Fast casual are more direct grocery competitors, and have experience higher avg. check growth vs. 2019 than full service."
Setyan said 2024 unit growth expectations for casual dining and fast casual restaurant chains are realistic and could be on the conservative side.
Related Link: Domino’s Pizza Bull Analyst Sees Multiple Catalysts Driving Stock Above $450 In 2024
Top Restaurant Stock Picks: The analyst highlighted several restaurant stocks for investors ahead of the 2024 year.
Setyan upgraded Cheesecake Factory Inc CAKE shares from Neutral to Outperform and raised the price target from $34 to $40.
"We view CAKE's 2024 SSS growth estimates as realistic and believe Q4's UL margins will validate the uptick expected in 2024," Setyan said.
The analyst said the company has recognized consistent transaction growth outperformance versus peers. Accelerated unit growth is also underappreciated according to the analyst.
The analyst upgraded Cava Group Inc CAVA shares from Neutral to Outperform and raised the price target from $35 to $48.
"We expect another quarter of upside vs. conservative guidance and consensus estimates in Q4 to validate a comp trajectory towards the MSD range in 2H:24."
The analyst said grocery poses a threat to fast-casual in 2024, but Cava's value proposition could help it overcome this headwind.
The analyst reiterates an Outperform rating on Dutch Bros Inc BROS and raised the price target from $35 to $37. The stock is on the Wedbush Best Ideas List.
"We believe the magnitude of sales transfer to have peaked in 2023, and to gradually decline in 2024 and thereafter."
The analyst said the company's management has focused on company-specific drivers for increased transactions, which could be in the early innings.
The analyst reiterated an Outperform rating on Domino's Pizza Inc DPZ and maintained a price target of $445. The stock remains on the Wedbush Best Ideas List.
"Within an increasingly value-focused QSR environment, we expect DPZ to win."
The analyst cited a marketing increase and an increased focus on value and menu innovation from the company driving future growth.
"Entry into third-party delivery to result in a near-term acceleration in transaction growth that is sustainable through 2024 and beyond."
The Restaurant Laggards: The analyst downgraded shares of Chipotle Mexican Grill CMG from Outperform to Neutral and raised the price target from $2,200 to $2,400.
"We believe a slowing transaction growth trajectory at CMG as 2024 progresses may jeopardize its current valuation."
The analyst says current limited-time offers could outperform similar offerings from last year.
The analyst downgraded shares of Wendy's Co WEN from Outperform to Neutral and lowered the price target from $24 to $21.
"We view WEN's premium QSR positioning as particularly at risk in an increasingly value-oriented QSR environment. We believe risk exists to Q4 and 2024 SSS growth expectations."
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