1 Restaurant Stock to Keep an Eye On and 2 That Underwhelm

Restaurants are go-to meeting hubs for friends, family, and colleagues. But the side dish is that they’re quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry has tumbled by 9.3% over the past six months. This drawdown is a stark contrast from the S&P 500’s 10.3% gain.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Taking that into account, here is one resilient restaurant stock pinned to our Google Maps and two we’re swiping left on.

Two Restaurant Stocks to Sell:

El Pollo Loco (LOCO)

Market Cap: $317.7 million

With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.

Why Do We Think LOCO Will Underperform?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
2. Subscale operations are evident in its revenue base of $479.7 million, meaning it has fewer distribution channels than its larger rivals
3. Estimated sales growth of 4% for the next 12 months is soft and implies weaker demand

El Pollo Loco’s stock price of $10.59 implies a valuation ratio of 12.3x forward P/E. Dive into our free research report to see why there are better opportunities than LOCO.

Red Robin (RRGB)

Market Cap: $119.3 million

Known for its bottomless steak fries, Red Robin (NASDAQ:RRGB) is a chain of casual restaurants specializing in burgers and general American fare.

Why Do We Pass on RRGB?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Earnings per share have contracted by 19.4% annually over the last six years, a headwind for returns as stock prices often echo long-term EPS performance
3. High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Red Robin is trading at $6.65 per share, or 1.9x forward EV-to-EBITDA. To fully understand why you should be careful with RRGB, check out our full research report (it’s free).

One Restaurant Stock to Watch:

Dutch Bros (BROS)

Market Cap: $9.18 billion

Started in 1992 by two brothers as a single pushcart, Dutch Bros (NYSE:BROS) is a dynamic coffee chain that’s captured the hearts of coffee enthusiasts across the United States.

Why Does BROS Catch Our Eye?

1. Rapid rollout of new restaurants to capitalize on market opportunities makes sense given its strong same-store sales performance
2. Same-store sales growth over the past two years shows it’s successfully drawing diners into its restaurants
3. Free cash flow margin increased by 9.8 percentage points over the last year, giving the company more capital to invest or return to shareholders

At $72.49 per share, Dutch Bros trades at 103.1x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.

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