The restaurants stocks to own in 2024, according to Bernstein

Looking to 2024, Bernstein believes it will finally be the first “normal” year for restaurants since 2019. However, the new “normal” 2024 comes with a very interesting setup, the firm argues, as restaurants are lapping mid- to high-single-digit price increases and consumers may have built price resistance. Chipotle (CMG) and Restaurant Brands (QSR) are Bernstein’s top picks for 2024.

2024 OUTLOOK: Bernstein believes the restaurant sector with return to normalized sales cycle in 2024, with same store sales growing 2%-3% driven by industry pricing at 2%-4%, about 1%-2% mix and marginally negative traffic. The firm expects heightened promotional environment in the first half of the year, and says that while unit growth will slow down, it believes concepts with large and well capitalized franchisees and demonstrated strong cash on cash returns will gain share.

Additionally, Bernstein thinks investors will prefer exposure to resiliency of U.S. consumers through more U.S.-focused brands at least in the first half of 2024. Restaurant margins will continue to improve, but regulatory and unionization risks remain an overhang, it adds. The firm also notes that the GLP-1 debate will resurge, as more drug trial readouts hit the market, which could have an impact on the sector.

TOP PICKS FOR 2024: Chipotle and Restaurant Brands are Bernstein’s top picks for this year. The firm expects Chipotle’s topline resilience amid slowing consumer sentiment, margin expansion led by productivity unlocks, and accelerated unit growth in the second half of 2023 will sustain investor interest. On the other hand, it expects hidden strength of Restaurant Brands’ international business, bottoming out of Burger King U.S. and continued outperformance in Tim Hortons will attract investors to the company’s rekindled growth story.

Yum! Brands (YUM) and Darden (DRI) continue to steadily increase their scale advantages, the firm argues. Bernstein believes that the former will grow ahead of its long-term algorithm led by demonstrated pricing power at Taco Bell, strength of KFC’s scale to provide unparalleled value, and continued innovation at Pizza Hut 2.0, underpinned by Yum! Brands’ scaled digital arbitrage. Darden continues to go from good to great, the firm says, as it leverages its scale, excellence in execution and M&A engine to generate double-digit TSR. Meanwhile, Wendy’s (WEN) screams value, in Bernstein’s view, as its record low valuation de-risks the downside, with double-digit TSR potential driven by an assured 5% dividend yield.

LESS BEARISH ON DOMINO’S PIZZA: Bernstein upgraded Domino’s Pizza (DPZ) to Market Perform from Underperform with a price target of $370, up from $330. Despite continued skepticism on the pizza category outlook, the near-term setup for 2024 has turned attractive and there are no immediate catalysts that could materially pressure Domino’s, the firm argues. However, it believes the stock’s valuation has run ahead of growth expectations and will eventually re-rate downward as the dynamics of a hyper competitive, mature category translate to moderating growth beyond the short-term growth catalysts.