The restaurant/dining industry is producing mixed numbers which can cause confusion. On the one hand, restaurant chains reported growing sales in the third quarter. On the other hand, foot traffic has plummeted in recent months as consumers cut back on dining out due to rising inflation.
Those who don’t dive deep into the numbers may miss the reality that most restaurants are only seeing increased sales because they increased their prices, even though the number of customer visits has decreased. In this article, to shed light on the potential pitfalls in the restaurant industry, I evaluated two dining stocks: YUM and BLMN — to see which is better. Upon further analysis, I am Bullish on BLMN and Neutral on YUM.
Hmm! Trademarks (New York Stock Exchange:YUM) owns the fast food brands KFC, Taco Bell, Pizza Hut, and a fast casual chain: The Habit Burger Grill. Meanwhile, Bloomin’ Brands (NASDAQ:BLMN) operates sit-down dining options Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse & Wine Bar, and fast-casual chain Aussie Grill, which was inspired by Outback.
Hmm! Brands (NYSE:YUM)
There’s a lot to like about Yum! Brands, especially in the event of a recession. Based on the company’s price/sales (P/S) and price/earnings (P/E) multiples, it appears that much of the upside potential could be priced in. However, if a recession hits, a reassessment may be in order. Therefore, a neutral view seems appropriate for now. Hmm! the actions are up 1.6% so far this year and 4.9% in the last 12 months.
The restaurant industry, in general, looks overvalued, based on its P/E ratio of 42.3 times versus its three-year average of 20.6. The industry is trading around its three-year average P/S multiple of 2.1. Hmm! it looks overvalued based on its P/S of 5.4 times, even though it is trading at a P/E of 29.4.
Of note, the company weathered the brunt of the breakneck inflation of 2022 intact, generating $6.7 billion in revenue and $1.28 billion in net income over the past 12 months. Placer.ai data for August 2022 showed that foot traffic at fast food restaurants decreased 1.2% for the month, while it fell 1.7% at fast casual restaurants and 4.7%. in full service restaurants. In September and October, fast food traffic recovered slightly, but fast casual and dine-in traffic remained in the red.
Despite his strength, mmm! has lost profit estimates for the last four consecutive quarters, although its same-store sales increased 5% in the last reported quarter. However, the company has dividend yield of 1.78%so it’s potentially a nice income holding.
What is the target price for YUM shares?
Hmm! Brands has a Moderate Buy consensus rating based on 11 Buys, six Holds, and zero Sell ratings assigned over the past three months. At $142.13, the average price target for Yum! brand stocks implies an upside potential of 9.66%.
Blooming Brands (NASDAQ: BLMN)
Bloomin’ Brands shares are up 58% since bottoming out over the summer, which may give some investors pause. However, the company looks undervalued based on its multiples, making a bullish view seem appropriate, at least for now. A recession could negatively impact Bloomin’ Brands’ sales, requiring a reassessment.
With a trailing P/S of 0.5x and a P/E of 24.3, Bloomin’ Brands looks undervalued, especially considering the signs of fundamental strength. For the third quarter, the company reported a 1.4% year-over-year increase in US comparable restaurant sales and a 30% increase in its international operations, consisting of Outback Steakhouse in Brazil.
To quantify the growth it has enjoyed since before the pandemic, Bloomin’ reported an 11% increase in U.S. comparable restaurant sales and a 25% increase in international comparable sales compared to Q3 results. quarter of 2019. Importantly, Bloomin’ Brands rallied in the third quarter despite reported declines in foot traffic to sit-down restaurants.
The company lost money during the second quarter of 2022, but posted a 4.5% increase in revenue and a more than 800% increase in net income during the third quarter. Unlike Yum!, Bloomin’ beat the consensus estimates for earnings and revenue for the last four consecutive quarters.
The action offers a dividend yield of 2.37%making it a solid addition to an income portfolio as well.
What is the target price for BLMN shares?
Bloomin’ Brands has a Moderate Buy consensus rating based on two Buy, four Hold and zero Sell ratings assigned over the past three months. At $26.33, the Average Price Target for Bloomin’ Brands Stock implies an upside potential of 6.2%.
Conclusion: Neutral on YUM, Bullish on BLMN
If there is a recession and its severity will affect both companies, so both require close monitoring in the short term, especially considering that runaway inflation could be the only reason their sales increased in 2022.
Foot traffic can be a critical differentiator for Yum! in a recession, but for now, Bloomin’ is looking better based on valuation. Time will tell if this thesis remains intact.
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