Consumer spending at restaurants surging 5% in 2023, up from 4% in 2022. Regardless of inflation, restrained consumer spending and mounting concerns of potential stagflation, analysts still anticipate sustained demand for dining-out experiences.
So far in 2024, the S&P 500 Restaurant Sub-Index has returned around 1.5%. It trails behind the broader S&P 500, which has advanced over 5%. However, the restaurant sub-index showed a better comparative performance in April when volatility on Wall Street picked up considerably.
Thus, now is a good time to identify companies with the potential for long-term growth in the restaurant sector. Let’s delve into three such stocks, especially if their prices decline in May, offering better entry points.
Darden Restaurants (DRI)
Darden Restaurants (NYSE:DRI) operates a portfolio of popular full-service eateries across the U.S. and Canada. Brands include Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen and Yard House. They cater to a range of dining preferences.
The restaurant giant announced financial results for the third quarter of fiscal year 2024 in late March. Quarterly revenue came in at $3.0 billion, up 6.8% year-over-year (YOY). Adjusted earnings per diluted share were $2.62, up 12% from the year-ago quarter. Elsewhere, investors noted the authorization of a new $1 billion share repurchase program.
Yet, the stock has lost 8% year-to-date (YTD), while the dividend yield is a hefty 3.5%. At present, the shares are changing hands at around 16.5 times forward earnings and 1.5 times sales. And Wall Street remains optimistic for the prospects of the restaurant group. The 12-month median price forecast for DRI stock is $181.50. Such an up move could potentially mean a 20% return for buy-and-hold investors.
Dave & Buster’s (PLAY)
The entertainment and dining chain Dave & Buster’s (NASDAQ:PLAY), offers a unique twist on restaurants. The business combines a casual eatery with an arcade experience, appealing to families and groups. Owning and operating locations across North America, Dave & Buster’s boasts a recognizable brand and a growing market for “eatertainment.”
Furthermore, management released Q4 and full year 2023 results in early April. Revenue of $599.1 million was up 6.3% compared with the year-ago quarter. Adjusted net income was $42.0 million, or $1.03 per diluted share, compared to $41.8 million, or 85 cents per diluted share, in the fourth quarter of 2022.
Recently, Dave & Buster’s, in expanding its global footprint, signed a franchise deal to develop two restaurants in the Dominican Republic. This adds to their existing international presence, with franchise agreements in several countries. Meanwhile, recent company headlines show that management is venturing into social betting. It is partnering with gamification technology company Lucra to create a new revenue stream. So, Dave & Buster’s loyalty members can place small bets on arcade games.
So far in 2024, PLAY stock has lost about 3%, while the shares are trading at 13 times forward earnings and 1.1 times sales. Meanwhile, the 12 month median price forecast is at $76.00 suggesting an upside potential of 45%.
Invesco Dynamic Food & Beverage ETF (PBJ)
The National Restaurant Association anticipates industry growth in 2024. Sales are projected to surpass $1 trillion. Moreover, the workforce poised to increase by an additional 200,000, reaching a total employment of 15.7 million.
Therefore, in looking at restaurant stocks to buy, investors should consider the Invesco Dynamic Food & Beverage ETF (NYSEARCA:PBJ). This ETF focuses on U.S. companies with robust fundamentals. It evaluates factors like quality, value, price and earnings momentum as well as management action.
Currently, PBJ holds 32 stocks across the food and beverage spectrum. Top holdings include Kroger (NYSE:KR), DoorDash (NASDAQ:DASH), Kraft Heinz (NASDAQ:KHC), Constellation Brands (NYSE:STZ), and PepsiCo (NASDAQ:PEP). The top ten names account for 46% of its portfolio.
Launched June 2005, the fund has a market value of approximately $130 million. Since January, PBJ has returned close to 4% and currently offers a 1.5% dividend yield. Meanwhile, the trailing P/E and price-to-book (P/B) ratios stand at 22.24x and 2.13x, respectively. A decline toward the $45 level could offer a better risk/return profile for potential PBJ investors. Finally, investors should note the expense ratio of 0.57%.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
Tezcan Gecgil, PhD, began contributing to InvestorPlace in 2018. She brings over 20 years of experience in the U.S. and U.K. and has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Publicly, she has contributed to investing.com and the U.K. website of The Motley Fool.