We recently published a list of 10 Best Restaurant Stocks To Buy According to Analysts. In this article, we are going to take a look at where Potbelly Corporation (NASDAQ:PBPB) stands against other best restaurant stocks to buy according to analysts.
The restaurant industry has been challenged this year, with ingredient prices skyrocketing, rising operating expenses, and growing tipping fatigue. This has resulted in a shift in consumer preferences as Americans become more cautious about their spending patterns.
READ ALSO: 11 Best Fast Food Stocks To Invest In Right Now and 7 Best Restaurant Dividend Stocks to Buy Now.
Quick-service restaurants are integral to American culture, with around 83% of the families in the country dining out at these at least once a week, and one-third of Americans consuming fast food daily. However, a recent survey revealed that about 78% of people consider fast food a ‘luxury’ now and are cutting down on their consumption amid rampant inflation in the country.
Increased commodity and supply chain costs have also hurt the broader restaurant industry through surging menu prices, prompting Americans to cook cheaper meals at home. Carnegie Investment Counsel’s portfolio manager, Razmig Pounardjian, stated the following to Reuters in May:
“The lack of value offers has opened up consumers to shop for different options whether it be other (chains) or the grocery stores.”
According to a report in the National Public Radio (NPR), published in August, grocery prices grew only 1.1% over the past year, whereas the cost of restaurant meals soared 4.1%. Since mid-2020, restaurant prices have surged by nearly 24% compared to the cost of grocery items, which has grown 19% during this period. As a result, several notable restaurant chains have seen their earnings plummet this year, as consumers opt for a grocery splurge over expensive dining.
Despite pressures, it is not all doom and gloom for America’s restaurant industry. The market remains resilient, driven by the general desire among the citizens to dine at restaurants. Another critical factor that keeps the industry alive is how well it adapts to changing consumer trends and preferences through new offerings and value deals.
This year, the National Restaurant Association expects sales to top $1.1 trillion and add 200,000 new jobs to the economy, marking a new milestone for the industry. A restaurant ETF issued by AdvisorShares had gained 27.53% year-to-date as of the close of day on November 13, outperforming the broader market by two percentage points.
The downturn in inflation also bodes well for the future of the restaurant industry. Consumer prices have eased down from the peak of 9.1% in June 2022 to 2.6% in October 2024. While inflation rose 0.2% from last month and went higher for the first time since March this year, the condition remains favorable with the figure staying close to the Federal Reserve’s goal of a two percent annual rate.
Interest rate cuts are also likely to help boost restaurant stocks in the long run, as the low cost of borrowing would allow restaurant owners to go ahead with their expansion plans and also encourage consumer spending. In September this year, the Federal Reserve announced a 50-basis point rate cut, the first since March 2020. This was followed by a further quarter-point reduction in early November to bring interest rates to a range of 4.50% to 4.75%.
Our Methodology
For this article, we sifted through screeners to identify stocks in the restaurant industry that had an average share price upside potential of 20% or higher as of the close of day on November 12, 2024. Then we listed the top 10 stocks in ascending order of their average share price upside potential. We have only considered stocks that had at least three analyst ratings.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A chef in a busy kitchen, adding the finishing touches to a signature sandwich.
Potbelly Corporation (NASDAQ:PBPB)
Average Share Price Upside Potential as of November 12: 47.14%
Potbelly Corporation (NASDAQ:PBPB) is an American corporation that owns the fast-casual restaurant chain, Potbelly Sandwich Shop. According to CNBC, there are 424 restaurants of the brand across 31 states and the District of Columbia. Amongst these, 345 are company-owned, while 79 are operated by franchisees.
Potbelly Corporation (NASDAQ:PBPB) announced its Franchise Growth Acceleration Initiative in March 2022, as part of which it aims to reach 2,000 restaurants over the next several years, with at least 85% of these shops being franchised. Total year-to-date shop commitments for 2024 are at 86 as of Q3 2024, an increase of 32 relative to the prior quarter. This has brought Potbelly’s open and committed shops to 695 across 33 franchise groups.
On November 7, Potbelly Corporation (NASDAQ:PBPB) announced financial results for the third quarter of fiscal year 2024, highlighting growth amid re-franchising efforts. System-wide sales in Q3 reached $139.2 million in Q3, up 1% year-over-year, due to system-wide unit growth. Revenue for the quarter was posted at $115.1 million, decreasing 4.7% last year due to the impact of re-franchising efforts.
Revenue from company-operated restaurants totaled $110.8 million. The remaining was contributed by franchise revenue that grew by $1.9 million, or 79.2% from last year, driven by a 30% increase in franchised units. Shop-level margin expanded by 70 basis points to 15.3%. Adjusted EBITDA for the quarter was posted at $8.7 million, representing 7.5% of total revenue. This was a 19% improvement from last year and was attributed to an increase in shop-level margin, disciplined G&A spending, and a strong performance of its franchise shops.
Potbelly Corporation (NASDAQ:PBPB) anticipates 2024 to be the best unit growth year for the company since 2017 by ending the year with a record number of franchise shops, which are expected to represent 22% of the system. It is one of the best restaurant stocks to buy according to analysts, with a consensus Strong Buy rating.
Overall, PBPB ranks 3rd on our list of best restaurant stocks to buy according to analysts. While we acknowledge the potential of restaurant companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PBPB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.