Yahoo Finance Zacks Investment Ideas feature highlights: McDonald's, Yum Brands, Chipotle, Wingstop and Ruth's Hospitality
For Immediate Release
Chicago, IL – May 3, 2023 – Today, Zacks Investment Ideas feature highlights McDonald’s MCD, Yum Brands YUM, Chipotle CMG, Wingstop WING and Ruth’s Hospitality Group RUTH.
How Commodities Prices Affect Restaurant Stocks
Restaurants are well known for being challenging businesses to run with a high rate of failure. But when done right they can be stellar businesses. There are a number of US and international restaurant stocks that have had amazing returns over the past decade, such as McDonald’s, Yum Brands and Chipotle.
Over the long term, business fundamentals are the most important factor for returns. But over the short-term other variables can play a role, and provide trade opportunities for discerning investors.
There are two restaurant stocks that experienced extremely divergent performances this year and a critical factor in that deviation has been commodities prices. Wingstop has benefited from a huge drop in the price of chicken wings over the past year, while Ruth’s Hospitality Group has been hindered by a dramatic rise in the price of cattle.
Wingstop
Wingstop has compounded at an annual rate of 32%, returning 800% since its 2015 IPO. It is also a Zacks Rank #2 (Buy) stock, indicating upward trending earnings revisions. WING has exploded in popularity, and sales have grown an average of 24% annually over the past eight years.
Rising commodity prices were one of several alarming and unpleasant phenomena that followed the Covid-19 pandemic. In the chart below we can see that following a dip in March 2020, the price of chicken wings nearly tripled to $3/lb. Fortunately for Wingstop, the price of chicken wings did not remain persistently high and has since collapsed to solidly below pre-Covid levels.
This has created a unique and beneficial situation for Wingstop. To accommodate for the initial rise in costs, Wingstop had to raise menu prices. But following the subsequent drop, Wingstop likely left prices as they were, or lowered prices less than the decrease in costs. Because customers got used to these new higher prices, it was easy for Wingstop to do it.
This led to a significant expansion in net margins for the wing shop. From Q2 2021 to today, net margins have increased 50%. Earnings are benefitting as well, and from Q4 2021 to Q4 2022 EPS grew from $0.24 per share to $0.60 per share.
Also worth noting is this bullish pattern building on WING stock. After breaking out above $190 level, the price action has coiled into a tight bull flag. A breakout above $200 should lead to another leg higher in the stock. Alternatively, below $195 and the pattern is invalidated.
New buyers of WING should be cautioned though. While there is a lot going for it today, WING is currently trading at 100x forward earnings, which is an incredibly rich valuation. At this point it is a momentum trade setup, rather than a place to initiate a long-term investment.
Ruth’s Hospitality Group
Ruth’s Hospitality Group, owner of the famous Ruth’s Chris Steakhouse has not fared as well as Wingstop. Over the past five years, RUTH stock is down -34%. However, RUTH does offer a generous dividend yield of 3.9%.
While Wingstop benefitted from the rapid decline in the price of chicken wings, purveyors of beef have not been as fortunate. The price of cattle has risen persistently since the Covid lows.
To account for this rise in the commodity price, RUTH has been forced to raise menu prices. This has allowed margins to remain flat over this time, but sales growth has been mixed.
Ruth’s Hospitality Group is trading at a much more reasonable valuation than Wingstop. Today, it trades at a one-year forward earnings multiple of 13x, which is well below the industry average of 27x, and below its five-year median of 15x.
Bottom Line
While commodities prices have played a role in both stocks’ returns there are other factors that have influenced them as well. RUTH is a much older company, and thus experiences less growth momentum than Wingstop, which is a prototypical growth stock.
Additionally, customers aren’t often picking between wings and steaks. Going out to a steakhouse is much more of a splurge than ordering wings for takeout. This brings up another factor worth considering. In the case of an economic slowdown, restaurants take a major hit, as discretionary spending is likely to pull back. But takeout restaurants like WING, likely to take less of a hit than a restaurant like RUTH.
It is possible that this theme is close to a conclusion, but it is a very useful case study for future trades, nonetheless.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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McDonald's Corporation (MCD) : Free Stock Analysis Report
Yum! Brands, Inc. (YUM) : Free Stock Analysis Report
Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
Ruth's Hospitality Group, Inc. (RUTH) : Free Stock Analysis Report
Wingstop Inc. (WING) : Free Stock Analysis Report
