Stock Analysis & Ideas

Which Fast-Food Stock Does Wall Street Love Ahead of a Recession?

Story Highlights

Fast-food stocks may prove great defensive pick-ups as the recession moves in. Despite their stretched valuations, each name seems poised to deliver for investors seeking a stock for all seasons.

With investors worried about a looming recession, fast-food stocks seem like a great place to hide. Arguably, the past year of inflationary pressures has already pushed consumers to choose higher-value fast-food firms over their more formal dine-in restaurant counterparts.

Even if a coming recession proves mild, the top fast-food firms seem likely to continue marching higher, even as consumer sentiment sinks to its lowest point in years.

In this piece, we used TipRanks’ Comparison Tool to look at three Strong-Buy-rated fast-food stocks that seem more than able to hold their own.

Chipotle Mexican Grill (CMG)

Chipotle has been one of the fastest-growing forces in the quick-serve restaurant scene over the past few years. Though promising growth prospects seem more than baked into the share price, with a hefty 65.4 times trailing earnings multiple, Chipotle’s ability to keep its growth momentum into a recession may yet be factored in.

What’s striking about Chipotle is not only its growth profile but its incredibly high ROE (return on equity) numbers. At writing, Chipotle commands a jarring 34.9% ROE, much higher than the restaurant industry average of 22.8%.

As the firm looks to capitalize on the “healthy” food trend, I suspect Chipotle will be able to keep its sales growth in the high single digits as it continues to drive operating margins higher.

Further, its “food with integrity” seems to differentiate itself from other players in the quick-serve restaurant scene. With fresh menu options, Chipotle will always be pricier than most of its peers. In any case, Chipotle has done a respectable job of shrugging off inflationary pressures.

Chipotle has made all the right investments in mobile and delivery. Looking ahead, I’d look to Chipotlanes (pick-up only) locations and new menu items to give a further jolt to the top-and bottom-line.

Simply put, Chipotle stock seems like a premium play that may be worth more of a premium. Wall Street analysts seem to think the pricy restaurant play is well worth the price of admission at around $1,750 per share, with 21 Buys and just three Holds. The average upside implies just 3% in year-ahead upside, however.

McDonald’s (MCD)

McDonald’s is a time-tested leader in the fast-food space. Though the quick-serve restaurant space has become quite crowded in recent decades, McDonald’s has found a way to stay at the top. In a prior piece, I praised its CEO Chris Kempczinski for making the old-time burger king more appealing to the younger consumer base. Celebrity-endorsed meals, kiosk rollouts, and other intriguing menu innovations could help McDonald’s retain its edge over its peers.

It isn’t just Kempczinski’s capable leadership that could keep McDonald’s stock going strong into a recession year. With the value menu that competitors strive to stack up against, McDonald’s has been the place to go to eat well without having to break the bank. While McDonald’s could easily jack up prices across the board, I think its disciplined pricing could help it take meaningful share from rivals in a recession. Few firms have the purchasing power to keep prices low in the face of profound inflationary pressures.

As more consumers turn to McDonald’s, the firm will have the ability to lock them in even when economic times are good again. The loyalty program and app help the firm stay close to customers. With greater interaction and more intriguing tech under the hood, I view McDonald’s as a steady ship that will sail right through chopper market waters that could sink most other corporations.

The “Accelerating the Arches” program aims to improve upon cost controls and tech initiatives. Such measures are sure to bolster operating margins through and after a mild Fed-mandated recession.

At 32.1 times trailing earnings, investors are eating up McDonald’s stock. Despite the rich multiple, Wall Street still loves the stock, with 21 Buys, four Holds, and 8.7% year-ahead upside expected.

Papa John’s Pizza (PZZA)

Papa John’s Pizza stock has been on a wild ride in recent years. Year to date, the stock is down nearly 37% to $84 and change per share. Undoubtedly, the lockdown-era pizza rush has come to an end. And with food delivery allowing consumers to get any type of food brought to their homes in a hurry, it’s not a mystery as to why Papa John’s sales have been sluggish of late.

Despite the lackluster 1.5% revenue growth clocked in during the second quarter, Papa John’s proceeded to raise its cash dividend by 20% (shares now yield 2%). The generous dividend hike did little to stop pressure on the share price, however.

Looking ahead, there are no easy ways around the broader public’s fading appetite for Papa John’s pizza. Competition has been too fierce of late, and it could stay that way as the recession rolls around.

Management seems to be looking toward menu innovation to reinvigorate sales. The new “Game of Thrones” pizza could be a hit with fans of the show. Further, Papa Bowls (topping without the crust) could be intriguing additions that could pave the way for a nice relief rally.

Sponsorships have been a key sales driver for Papa John’s over the years. With unorthodox new offerings and partnerships, I expect the stock is too depressed going into a recession year. Wall Street agrees, with a “Strong Buy” rating, seven Buys, two Holds, and an average upside of 38.3%.

Conclusion

Fast-food stocks are a great place to ride out a coming storm. Of the three Strong Buy-rated stocks, Wall Street thinks Papa John’s stock can deliver the juiciest returns.

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