Wall Street chooses winners in restaurant space for 2024
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Wall Street chooses winners in restaurant space for 2024

Slightly below-historical growth, less pricing, pockets of risk, but relative cost and operating stability, a stable consumer and better balance sheets leave Morgan Stanley cautiously optimistic on the Restaurant and Foodservice Distributor space. The firm is Overweight on Domino’s Pizza (DPZ), Starbucks (SBUX), McDonald’s (MCD), Yum! Brands (YUM), Cava Group (CAVA), Darden (DRI), US Foods (USFD), and sees less favorable risk/reward skew in most small-to-mid cap names in the space after their 2023 performance.

On the other hand, Gordon Haskett is less bullish on Starbucks and more bullish on Brinker, downgrading the former to Hold and upgrading the latter to Buy. Looking to 2024, the firm’s top picks in the restaurant space are McDonald’s, Brinker, Dave & Buster’s (PLAY), Chipotle (CMG), and Wingstop (WING).

SOFT LANDING IN 2024: Last year, Morgan Stanley forecasted material demand slowing, but the consumer economy held up better than expected. The firm is less pessimistic now and thinks this year will look somewhat normal — slower growth, most likely, given key economic variables already softening and less pricing power, but not much below historical trends for foodservice, with a couple of caveats that present more downside than upside risk to its outlook.

SMID-caps and casual diners seem relatively interesting to Morgan Stanley if U.S. growth overshoots in 2024, with the firm thinking more discretionary occasions still are somewhat challenged. Prospects could look better into 2025. Morgan Stanley believes large quick-service restaurants, or QSRs, are mixed, with some more fully valued and others more compelling, though it sees greater earnings visibility and more resilient sales trends here.

MORGAN STANLEY PICKS FOR 2024: Among the large QSRs, the firm likes Domino’s Pizza and upgrades Starbucks to Overweight. Morgan Stanley also has Overweight ratings on McDonald’s and Yum! Brands. The firm continues to think Overweight-rated Domino’s Pizza offers an interesting catalyst path this year and further stock upside, one of few where there is a materially improving narrative into 2024 and where value and convenience are sharp. Meanwhile, the firm gets more bullish on Starbucks, upgrading the stock to Overweight on the view that recent weakness and various near-term headwinds have created an entry point for a growth story with a number of possible catalysts over the next 1-2 years. Further, Morgan Stanley believes the core business remains attractive, not impaired as the stock seems to assume.

Additionally, the firm remains bullish on McDonald’s, with valuation not as accommodating currently but good earnings visibility and relative confidence in the accelerating growth story recently laid out, and on Yum! Brands, which for Morgan Stanley is mainly valuation driven. Given recent performance, the firm doesn’t see as compelling of risk-reward skew in the rest of its coverage, but is Overweight on Cava and Darden, and Underweight on Cheesecake Factor (CAKE), while downgrading Brinker, Sweetgreen (SG) to Underweight.

For Brinker, Morgan Stanely thinks many constructive changes are well underway, but given some of these broader risks, it has concerns about how the brand holds up on a relative basis, and the margin and return profile remains structurally lower versus peers. Regarding Sweetgreen, the firm has a favorable view of the brand and recent innovation, but says that at the moment a big part of the story seems to be the bet on automation, which could drive a step change in economics and fuel development if it works, but also feels like one of the riskier tech initiatives in the sector at the moment.

Lastly, Morgan Stanley is still generally constructive on food distributors, with US Foods being its preferred pick and Performance Food (PFGC) most likely to pursue bigger M&A.

GORDON HASKETT 2024 OUTLOOK: Discussing the common themes of Buy-rated stocks, Gordon Haskett sees discreet same-store sales drivers in play for Domino’s Pizza, Brinker, and McDonald’s. With fundamentals most levered to stronger-than-expected consumer resiliency in 2024, Gordon expects the consumer to prove more resilient than expected this year and favor stocks most levered to this resilience. The firm sees valuation multiples most levered to potential Fed Funds rate cuts in 2024. When rates potentially move lower in spring/summer 2024, Gordon favors stocks most levered to falling Fed Funds target rates.

RATING CHANGES: The firm upgraded both Domino’s Pizza and Brinker to Buy from Hold with price targets of $467 and $48, respectively. Gordon Haskett views Domino’s shares as “compelling” given concept-specific market share drivers that could make current Street 2024 same-store sales growth estimates “conservative.” Meanwhile, Gordon Haskett increasingly likes the risk/reward on Brinker’s shares given its expectation for accelerating market share recapture driven by TV advertising of value-based menu offerings and traffic tailwinds with the rollout of targeted digital marketing in spring 2024.

On the flip side, the firm downgraded Starbucks and Wendy’s to Hold from Buy with price targets of $100 and $21, respectively. With Starbucks’ shares down 13% over last two months, U.S. same-store sales volatility and decreased China recovery visibility are appreciated by the market. Still, the firm is moving to the sidelines given what it sees as diminished upside and upward revision prospects. Regarding Wendy’s, Gordon Haskett says U.S. traffic growth appears to have sequentially softened in Q4, with the firm looking for continued U.S. traffic declines in the backdrop of an increasingly promotional U.S. burger segment, which it sees limiting Wendy’s upward revision prospects in 2024.

The firm remains Underperform with both BJ’s Restaurants (BJRI) and Cracker Barrel (CBRL) on lagging same-store sales.

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