Stock Analysis & Ideas

3 Restaurant Stocks That Are Trading Cheaply; Analysts Say ‘Buy’

Over the past week, the new Omicron variant of the corona disease has put a scare back into the market. With volatility back on the menu, restaurant stocks, with a business model that leaves them more vulnerable to viral spread than most businesses, fell harder than most on the news.

While restaurants obviously benefited from the reopening of the economy, many restaurant stocks have still underperformed the market this year. New variant fears aside, some Street analysts see several names as ripe for the picking right now.

Using the data tools from TipRanks, we’ve pulled up the details on three restaurant stocks that show not just Buy ratings but also substantial upside potentials. Let’s look at what’s on offer.

Red Robin Gourmet (RRGB)

We’ll start with Colorado-based Red Robin, the well-known casual dining chain founded in Seattle back in the 40s. The company opened its first franchise location in 1979, and today the chain boasts 525 restaurant locations across the US and Canada; most of the locations are company-owned, but 90 are franchises.

In recent years, the restaurant chain expanded its menu offering through a partnership with Ohio-based Donato’s Pizza. That move was successful, and the companies are expanding their joint operations this year. Red Robin plans to have Donato’s pizza items on the menu in more than 200 locations by the end of 2021. Adding pizzas, for dine-in or take-out, to the menu has been a boon for Red Robin, which anticipates $60 million in sales and $25 million in new profits from the pies by 2023.

Red Robin reported its 3Q21 earnings in November, and the stock slipped on news that both revenues and earnings missed expectations. At the bottom line, the 88-cent EPS loss was deeper that the 45 cents anticipated, while the top line revenue of $275 million came in just under the $278 million forecast. Total sales have slipped from their Q1 spike to $326 million; both Q2 and Q3 showed sequential declines. One possibility: the chain benefited in Q1 from the reopening of the economy and the surge of returning customers. The subsequent quarters have reverted to pre-pandemic revenue levels. One item to note: Q3’s revenue was up 37.5% year-over-year.

In all of that, Red Robin’s stock price is down this year, by 13%. The stock peaked in March, above $40, and has since lost 59%.

Todd Brooks, of Benchmark, follows Red Robin and has initiated his coverage of the stock with a Buy rating and a $30 price target, implying a one-year upside of 79%.

Backing his stance, Brooks writes, “A litany of company specific initiatives in conjunction with retained off-premises revenues added during the pandemic should allow RRGB to generate materially higher average unit volumes (AUV’s) going forward.”

He adds, giving some light on those initiatives, “By the end of FY21, Donatos Pizza will be rolled out to 200 RRGB locations, with a planned doubling of locations to 400 by the end of FY22. RRGB is seeing a 4%+ increase in same store sales (SSS) in locations with a Donatos. Additionally, RRGB has launched 3 virtual brands March of this year which generated $5.9M in revenue in 3Q21.” (To watch Brooks’ track record, click here.)

While there are some mixed reviews on this stock, there is a bullish case to be made here, and a majority of the analysts – 3 out of 5 – are taking that position, giving RRGB a Moderate Buy consensus rating. The shares are selling for $16.73 and their $27.80 average target suggests a one-year upside of 66%. (See Red Robin’s stock analysis at TipRanks.)

BJ’s Restaurants, Inc. (BJRI)

Next up is the California-based BJ’s, a restaurant and brewhouse chain with over 200 locations spread across 29 states. The company has a signature deep-dish pizza and a ‘never replicated’ Pizookie dessert, along with a range of proprietary craft brews on draft. The beers are brewed at the company’s wholly-owned brewery facilities. BJ’s got its start in 1978, and added the brewing operations in 1996.

BJ’s saw a serious hit due to the corona crisis. Starting in Q2 of 2020, revenues dropped sharply – and did not return to pre-pandemic levels until Q2 and Q3 of this year. The most recent quarterly report showed $282.18 million at the top line, up 42% from 3Q20 and a slight 1.2% increase from pre-pandemic 3Q19. EPS came in at a 13-cent loss, down sharply from the 26-cent EPS profit in Q2. The earnings weren’t all gloom; Q3’s EPS loss was far narrower than the 44-cent loss recorded in the year-ago quarter. Nevertheless, both the top-and bottom-line results missed expectations.

The company noted the quarterly results were influenced by serious headwinds, including the resurgence of the corona virus, that reduced staffing levels and dining room capacities. The real-world performance has impacted the stock’s price. Overall, BJRI shares are down 47% from their peak value, hit in March of this year and 14% year-to-date.

However, latest signs are that the stock could be on the mend, boosted by recent positive management commentary regarding the chain’s outlook.

Benchmark’s Todd Brooks, who also covers this name, mirrors management’s sentiment. “BJRI is well positioned to redefine the sales potential of each unit post-pandemic. Through a return to pre-pandemic dine-in volumes, the retention of a portion of incremental off-premises revenues generated through newer channels during the pandemic (specifically third-party delivery and curbside delivery options), and revenues from new company-specific sales initiatives, we believe that BJ’s will generate materially higher AUV’s in a postpandemic normalization,” the analyst said. “These higher AUV’s (average unit volumes) will allow the company to lever fixed operating expenses, which should allow BJRI to help absorb current inflationary pressures and to return to prior peak restaurant-level operating margins.”

These comments back up Brooks’ Buy rating, while his $48 price target indicates that the stock has room to gain 45% over the coming year. (To watch Brooks’ track record, click here.)

This stock holds a Moderate Buy consensus rating from the Street, based on 12 reviews that include 8 Buys, 3 Holds and 1 Sell. The stock is selling for $33.16 and its $44.50 average price target implies a 12-month upside potential of 34%. (See BJ’s stock analysis at TipRanks.)

BurgerFi International (BFI)

Last on our restaurant list today is BurgerFi International, a Florida-based chain boasting 120 corporate-owned and franchise restaurants featuring an ‘all-natural premium burger experience.’ The chain has been voted the best fast casual dining experience in recent years, and the restaurants can be found in 22 states plus Puerto Rico.

BurgerFi took advantage of the rising market trends to go public last December, entering the ranks of public companies through a SPAC transaction completed on December 17, 2020. The merger transaction, with OPES Acquisition Corporation, cost $100 million, and left the combined entity with $40 million in cash for expansion and other activities.

Since the company entered the public trading markets almost one year ago, the stock has declined. It reached its post-SPAC peak in February of this year, and is down 58% from that level.

The share price losses have come even as the company reported solid sales activity. The most recent quarterly, released last month for 3Q21, showed a 34% revenue gain at corporate-owned locations, part of a 25% overall sales gain through the company. Total top-line revenue came in at $11.1 million. New location openings helped to propel the gain in revenue.

In a move that both expands menu items and feeds a multibrand strategy, BugerFi in November completed its acquisition of Anthony’s Coal Fired Pizza & Wings. The acquisition cost the company $156.6 million, but is expected to recoup in long-term growth.

5-star analyst Peter Saleh, initiating coverage of BurgerFi for BTIG, bases his upbeat outlook on what he sees as a clear strategic plan for the company going forward. Saleh says, “…we believe new leadership has enacted much needed rigor and disciplines to a healthy brand, nurturing its growth and allowing it to reach its full potential. While we are encouraged by the pace of unit development and the strategic shift to cluster stores together to leverage brand awareness and marketing budget, we are most excited about recent acquisition of Anthony’s Coal Fired Pizza and the opportunity to expand the footprint through franchising. Strategically, we could not be more aligned with management’s decision to utilize ghost kitchens to gain exposure in urban markets with no capital or brand risk. Looking ahead, we expect the company to leverage its franchisee base to grow the Anthony’s brand while eventually adding more franchisable brands to the portfolio.” (To watch Saleh’s track record, click here.)

The analyst’s comments come along with a Buy rating and an $11 price target that points toward a 59% upside for the coming months. Saleh’s is the only review on record for this stock, which is currently selling for $6.93. (See BurgerFi’s stock analysis at TipRanks.)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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