As restaurants around the world have started re-opening, following the easing of pandemic restrictions, restaurants finally seem to be on their way to economic recovery.
According to a report from the U.S. National Restaurant Association, food and beverage sales in the food service industry and restaurants are expected to be up 19.7% year-over-year, totaling $789 billion this year.
Using the TipRanks stock comparison tool, let’s compare two restaurant chains, Chipotle Mexican Grill, and Yum! Brands, and see how Wall Street analysts feel about these stocks.
Chipotle Mexican Grill Inc. (CMG)
Chipotle Mexican Grill owns and operates Chipotle Mexican Grill restaurants, which focus on Mexican food.
Chipotle’s second-quarter revenues jumped 38.7% year-over-year to $1.9 billion and marginally surpassed analysts’ expectations of $1.88 billion. Adjusted diluted earnings came in at $7.46 per share, beating the Street’s estimates of $6.49 and up by a whopping 1,765% year-over-year.
Comparable restaurant sales grew 31.2%, while digital sales continued to be a strength for Chipotle, increasing 10.5% year-over-year to $916.5 million.
The company is expected to announce its Q3 results on October 21. CMG expects that in Q3, comparable sales in restaurants will be in the “low to mid double-digits range.” Furthermore, this year, it expects to open 200 new restaurants. (See Chipotle stock chart on TipRanks)
Robert W. Baird analyst David Tarantino believes that CMG’s comparable sales in Q3 will “meet or exceed estimates (modeled +13.0%, consensus +13.7%; guidance called for low-to-mid double digits).”
The analyst has a Buy rating and a price target of $2,150 (17.5% upside) on the stock.
Last month, CMG also introduced Smoked Brisket in the U.S. and Canadian markets for a limited time.
Following this announcement, analyst Tarantino cited Google (GOOGL) search trends to suggest that this launch could “prove to be another impactful catalyst for consumer engagement for the Chipotle brand,” and could provide “a nice boost to sales on a near-term basis.”
Moreover, the analyst is of the view that the introduction of new products by Chipotle could result in bringing new or “lapsed” customers to the brand, even beyond the promotional period.
Tarantino also thinks that the smoked brisket launch and other factors could “contribute to accelerated brand momentum entering Q4, a dynamic that could add visibility into the company’s ability to deliver its targeted average unit volumes of $3+ million sooner rather than later.”
Summing it up, the analyst concluded that the premium valuation for CMG was justified “by the company’s scarce long-term growth opportunity and capital-efficient growth model.”
Turning to the rest of the Street, Wall Street analysts are cautiously optimistic about Chipotle Mexican Grill, with a Moderate Buy consensus rating, based on 17 Buys and 8 Holds.
The average Chipotle Mexican Grill price target of $1,940.70 implies 6% upside potential from current levels.
Yum! Brands (YUM)
Yum! Brands operates around 51,000 restaurants across more than 150 countries, primarily through its brands like The Habit Burger Grill, Taco Bell, Pizza Hut, and KFC. 98% of the company’s restaurants are operated by franchises.
The company’s Taco Bell is a strong competitor to Chipotle Mexican Grill (CMG).
In the second quarter, YUM’s total revenues went up 34% to $1.6 billion, surpassing analysts’ expectations of $1.48 billion. Adjusted earnings increased 41% year-over-year to $1.16 per share, beating the Street’s estimate of $0.95.
David Gibbs, CEO of Yum! Brands said, “Our strong second-quarter results, led by record unit development and 23% same-store sales growth are a testament to our iconic brands, world-class talent, and best-in-class franchisees. I’m proud that each of our divisions reported positive same-store sales growth on a 2-year basis, a step up from first-quarter trends.” (See Yum! stock chart on TipRanks)
Considering the strong second-quarter results, the company revised its long-term unit growth rate from 4% to between 4% to 5%. Yet, due to the delta variant, it seems that the company has suffered a setback in China.
China is a significant international market for Yum! Brands and it has a franchise, Yum! China, in that country. In Q2, China contributed $74 million to the company’s total revenues.
Last month, according to Robert W. Baird analyst David Tarantino, Yum! China gave an intra-quarter update that indicated that “two-year comps in August were down nearly 20%, or well below the levels seen in Q2 overall (estimated down 6-7%; July not given)” as an outbreak of the COVID-19 delta variant affected certain regions in China. That lead to temporary restaurant closures and a reduction in mobility and travel.
While restaurant traffic was on its way to recovery as the outbreak subsided, analyst Tarantino reported that Yum! China cautioned that a complete sales recovery could take time.
However, according to the analyst, in 2020, China represented only “16% and 10% of global franchise revenue for these [KFC and Pizza Hut] segments, respectively, given that China operates under a 3% licensing arrangement.”
As a result, Tarantino believes that “the impacts of the China deceleration will have a greater impact on YUM’s system sales and comps performance than on profitability.”
While acknowledging that the COVID-19 pandemic was “clouding the short-term fundamental outlook in certain international markets,” Tarantino also believes that “YUM’s business model and franchisees are durable enough to withstand this temporary headwind.”
The analyst has a Buy rating and a price target of $150 (21.4% upside) on the stock.
Turning to the rest of the Street, Wall Street analysts are cautiously optimistic about Yum! Brands, with a Moderate Buy consensus rating, based on 7 Buys and 8 Holds.
The average Yum! Brands price target of $138.92 implies 12.4% upside potential from current levels.
Bottom Line
While analysts are cautiously optimistic about both stocks, based on the upside potential over the next 12 months, YUM seems to be a better Buy.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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