Dining trends are favorable for restaurants over the long haul.
It’s no surprise that dining out has become a great American pastime. Taking away the stress of home cooking, meal planning, and more importantly, the time involved, it’s easy to see why more and more Americans are dining out.
That trend is likely to continue for the foreseeable future.
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And while starting a new restaurant idea from scratch can be a tough business, established chains have been doing well the past few years. We expect that trend to continue.
Restaurants vary from fast-food to high-end experiences. But for publicly-traded companies, most focus on lower and middle markets… where there’s still a lot of profitability.
Restaurant Investment #1: McDonald’s (MCD)
One of the world’s largest chains, it’s been in and out of favor with the markets for some time. Shares may go for a year or two without seeing much of a rally, before exploding higher to new heights.
That could be the case this year. Last year’s share rally was stalled on slowing sales and as the company’s board of directors terminated the company CEO for having an inappropriate relationship with a staffer.
Nevertheless, the company has a lot going for it. The fast food chain has managed to earn a mouth-watering 28 percent profit margin on all the burgers, fries, and sodas it sells. And while revenue is up less than 4 percent in the past year, earnings have managed to rise 11 percent.
For income investors, it’s an even more attractive play. Shares pay out a 2.3 percent dividend yield, but the company has been growing out its dividend every year for decades. The yield just got bumped to $5 per share annually from $4.73.
All in all, that’s not too shabby. We see some reasonable upside in shares over time. The company’s branding and positioning appear unbeatable.
But this is also a great defensive play as well. McDonald’s was only one of two Dow 30 stocks to rise in 2008, the last year the stock market really got clobbered. The company’s positioning ensures that it won’t lose market share in an economic downturn, and may even gain some as well.
That’s a powerful trend we like to see.
We like shares up to $215, where we’re getting a reasonable valuation and a reasonable dividend. The returns will take care of themselves in time, but if shares start to move, they could break their old highs and hit $230 or better by the end of the year.
For that scenario, we like the January 2021 $240 calls. They trade for around $3.90, making them an inexpensive bet on a massive move higher. And if shares end up having a second underperforming year in a row, which is rare but possible, the call option limits potential losses.
Restaurant Investment #2: Sysco Corporation (SYY)
During a gold rush, the real money isn’t made by the miners. Rather, it’s made by suppliers, who provide everything from pickaxes to jeans.
The restaurant industry has many long-lasting winners. But it also has a number of companies that don’t make it too. But companies that supply the sector can also be consistent winners.
Sysco Corporation is one such play. It supplies frozen foods, fresh seafoods, as well as non-food items like disposable napkins, plates, and cups, as well as traditional silverware, kitchen supplies and cleaning supplies.
Besides the restaurant industry, it’s big anywhere where food is prepped, such as hospitals, schools, hotels and colleges.
Thanks to its role as a supplier, the company is in a good long-term space.
Right now, shares are off, down about 13 percent from their peak. That’s helping to push the valuation of the company down to a reasonable level. With earnings up over 43 percent in the past year, shares are starting to look like a buy at 18 times forward earnings.
The downside? Right now the company has struggled to increase its overall revenue. The rise in earnings has come from improving operationally. That’s still good, and judging from the current 3 percent profit margin, there’s still room for even further improvement.
We see that trend playing out in time.
For investors, this is another long-term dividend winner. The company recently increased its annual payout from $1.62 to $1.80, and shares yield 2.3 percent right now. Over time, there’s been a great track record here.
We think investors should look to start building a position at $75 per share. But they should set aside capital to buy more shares should they drop lower. That will take advantage of today’s slight value, and take advantage of any further downside in shares that may develop as well.
For options traders, we don’t see a huge opportunity here yet given the recent decline in shares. Buying calls with an $80 strike may look attractive in time, but the downtrend may not have fully stopped yet.