The restaurant stocks to own in 2024, according to Wedbush

Discussing the restaurant space and its outlook for the upcoming year, Wedbush said it sees small cap restaurant valuations as attractive in a declining interest rate environment. On the other hand, the firm expects restaurants’ unfavorable gap versus grocery that has existed through the second half of 2023 to last through at least the first half of 2024. Wedbush has upgraded Cheesecake Factory (CAKE) and Cava Group (CAVA) to Outperform, while downgrading Chipotle (CMG) and Wendy’s (WEN) to Neutral. Additionally, the firm added Dutch Bros (BROS) to the firm’s Best Ideas List.

2024 OUTLOOK: As food cost inflation moderates, Wedbush expects restaurants’ mid-3% unfavorable gap vs. grocery that has existed through the second half of 2023 to last through at least the first half of 2024. The firm also believes the unfavorable gap, even if it closes to some extent, could last through 2024 and into 2025. Further, Wedbush expects the normalization in consumer spending observed in the second half of 2023 to continue through 2024. The firm views quick service restaurant and fast casual as more direct competitors to grocery as a higher proportion of sales are meal replacement occasions relative to full service’s more event/social-driven occasions.

Wedbush also said it believes the small cap restaurant valuation discounts relative to historical multiples look attractive in a declining interest rate environment. Additionally, the firm expects continued margin normalization in 2024, but acknowledges that quick service restaurant leverage seems optimistic. Lastly, Wedbush sees 2024 unit growth expectations for casual dining and fast casual largely realistic, if not conservative. Nonetheless, risk to quick service restaurant expectations exists, the firm adds.

BUY THESE STOCKS: Wedbush upgraded Cheesecake Factory to Outperform from Neutral with a price target of $40, up from $34. The firm views Cheesecake Factory’s 2024 same-store sales growth estimates as realistic and believes Q4’s UL margins will validate the uptick expected in 2024. Wedbush views Cheesecake’s consistent transaction growth outperformance vs. the peer set, North Italia’s and Flower Child’s consistent positive transaction growth, Cheesecake Factory’s margin trajectory, and compelling CoC returns that is leading to accelerated unit growth, as underappreciated. The firm is also hopeful that a declining interest rate environment will alleviate the outsized pressure on its valuation.

Wedbush also upgraded Cava Group to Outperform from Neutral with a price target of $48, up from $35. The firm expects another quarter of upside vs. conservative guidance and consensus estimates in Q4 to validate a comp trajectory towards the mid-single-digit range in the second half of 2024, inclusive of positive transactions. While Wedbush views lower grocery inflation as an incremental threat to the fast casual category in 2024, it also believes Cava’s relative value proposition and maturation cycle contribution to comp positions it to overcome the incremental headwind. Should the firm’s same-store sales growth expectation materialize, Wedbush views current 2024 margin estimates as overly conservative.

BEST IDEAS LIST: Keeping an Outperform rating on the shares, Wedbush raised its price target on Dutch Bros to $37 from $35 and added the name to Wedbush’s Best Ideas List. The firm believes the magnitude of sales transfer to have peaked in 2023, and to gradually decline in 2024 and thereafter. Concurrently, management has focused on a number of company-specific transaction drivers that the firm thinks are in the very early innings. Additionally, Wedbush would not be surprised if pricing is similar in 2024 as in 2023. As such, it views current 2024 same-store sales growth expectations as realistic. The firm also views margin expectations as realistic, and expects Q4 results and 2024 guidance to act as a positive near-term catalyst to drive an expanding valuation.

Additionally, Wedbush also maintains Domino’s Pizza (DPZ) on its Best Ideas List. Within an increasingly value-focused quick service restaurant environment, the firm expects Domino’s to win. Wedbush views current operating margin expectations as conservative, and as CoC returns continue to improve, we expect unit growth acceleration to follow.

MOVING TO THE SIDELINES: More bearish on the name, Wedbush downgraded Chipotle to Neutral from Outperform with a $2,400 price target. The firm believes slowing transaction growth at Chipotle as 2024 progresses may jeopardize its current valuation while it also views a consumer “more focused on check management as a threat.” Wedbush is incrementally cautious as the timing of Carne Asada’s end largely coincides with price increases.

The firm also downgraded Wendy’s to Neutral from Outperform with a $21 price target. Wedbush views Wendy’s premium quick-service positioning as particularly at risk in an increasingly value-oriented quick service restaurant environment and believes risk exists to Q4 and 2024 same-store sales growth expectations.