We recently compiled a list of the 10 Best Restaurant Stocks to Buy Today. In this article, we are going to take a look at where Yum! Brands, Inc. (NYSE:YUM) stands against the other restaurant stocks.
Currently, quite a bit of anxiety is struck by restaurant stocks in the market, as the Russell index that tracks restaurants experienced a 6% fall since March 2024. Other sectors, like industrials, and materials, to name a few, are experiencing a similar struggle as restaurants. This situation, as a whole, is indicative of potential late-cycle market issues marked by the market’s slow growth in general, which is driven by consumer distress in the U.S. in a larger sense.
Moreover, amidst this inflation-stricken market, restaurants in the U.S. are in quite a bit of a meal deal war, hoping to fulfill the customers’ need for affordability. As such, Sonic, a drive-in fast-food chain headquartered in Oklahoma, U.S., is the newest member to join the war, as it has introduced a $1.99 value menu, boasting a selection of various food items.
Previously, Taco Bell and Burger King have already introduced their discounted meal deals, showcasing various brands’ dire attempts to attract customers in the given circumstances. Moreover, this is also driven by increased food and wage costs in the market, pushing down the margins of various restaurant brands, according to analysts. The Consumer Price Index has risen at a cumulative rate of 20.8% since February 2020, as reported by Bureau of Labor Statistics data. Thus, this explains why restaurant ETFs and stocks have started off the third quarter on a lower note.
Nevertheless, there’s bright hope as the global fast food, which goes hand-in-hand with the restaurant industry, is set to grow at a CAGR of 3.7% from 2023 to 2032, expected to reach $1 trillion by then. Furthermore, one can keep their hopes high, as it is reported that a staggering 37% of the U.S. population is a consumer of fast food. For the fast-food market, the millennial segment is one that it must rely on the most, as 54% of this segment steps toward fast-food chains once or twice every week. You can check out our article about the 20 Fast Food Chains with Most Locations in the World.
On the other hand, according to the National Restaurant Association, the U.S. restaurant industry is forecasted to result in $1.1 trillion worth of sales in the year 2024. This will translate into the employment of 15.7 million Americans. However, amidst the supply chain inefficiencies and rising costs, it would be challenging for restaurant operators to make profits, and technology is expected to play a decisive role in determining the winners and losers of the market in the coming time, according to market analysts.
Thus, it’s essential to know where to put your money, when it comes to the restaurant market. Hence, now we will take you to our list of 10 Best Restaurant Stocks to Buy Today.
Methodology
To curate our list of 10 Best Restaurant Stocks to Buy Today, we gathered a list of all companies with a significant presence in the restaurant industry. We then further narrowed down the list based on the companies’ respective upside potential and ranked the finest remaining companies by their number of hedge fund holders as of Q1, 2024, using Insider Monkey’s database that tracks the activity of 920 hedge funds. For stocks with an equal number of hedge fund holders, we used their upside as the tiebreaker. Plus, note that all the stock prices quoted are as of writing this article unless otherwise stated.
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 kitchen preparing a fast food meal of chicken, pizza and burgers.
Yum! Brands, Inc. (NYSE:YUM)
Number of Hedge Fund Holders: 35
With brands like mighty Pizza Hut, much-loved Taco Bell, and everybody’s favorite KFC under its belt, Yum! Brands, Inc. (NYSE:YUM) is one of the 10 Best Restaurant Stocks to Buy Today.
The stock has 35 hedge funds holding stake in it, worth $584.4 million, as of Q1 2024 – this is an increase of two hedge fund holdings, as compared to the previous quarter, which indicates the rising popularity of the stock in the investment sense. Also, another thing that explains why the stock is placed in our list of best restaurant stocks to buy today is its upside potential – the analysts look at the stock price rising to $145.72, as compared to its current price of $129.58, which translates to an upside potential of 12.5%.
Yum! Brands, Inc. (NYSE:YUM) missed the analysts’ expectations for the 1st quarter of 2024, as it recorded an EPS of $1.15, and a revenue of $1.6 billion, both below analysts’ expectations. Net income saw an uptick to $314 million, growing year over year by 4.6%. The Middle East conflict i.e. Israel-Gaza conflict is one reason that the company believes has driven this timid growth in the quarter.
However, the following is what the company’s CFO, Chris Turner, said about the company’s outlook for the year:
“As a reminder, we shared on our last call the intent to purchase 218 KFC UK and Ireland stores. We’re excited to report we officially closed this acquisition at the end of April. These stores have average unit volumes above $2 million and healthy store level cash margins. We expect the addition of these units to provide approximately $40 million of incremental EBITDA in the 12 months after acquisition while the benefit to our operating profit will be largely offset over the next several years due to depreciation and amortization, including amortization of reacquired franchisees.
We are confident that 2024 will showcase a strong unit development story at or above 5% unit growth, led by KFC International as franchisees capitalize on our brand’s attractive paybacks. In the U.S., Taco Bell continues to balance core everyday value to cater to a more discerning consumer across income groups with premium innovation to attract new consumers. We expect full year Taco Bell company-operated margins to be in the range of 23% to 24%. Excluding the 53rd week, we now expect ex special G&A to be flat to down slightly for the year, including incremental G&A associated with the KFC UK acquisition. Finally, we are confident we will deliver at least 8% core operating profit growth excluding the benefit of the 53rd week.”
Overall YUM ranks 6th on our list of the best restaurant stocks to buy. You can visit 10 Best Restaurant Stocks to Buy Today to see the other restaurant stocks that are on hedge funds’ radar. While we acknowledge the potential of YUM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than YUM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.