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Forget Papa John’s, Buy These 4 Restaurant Stocks Instead


The restaurant industry has been witnessing a volley of changes of late. Restaurant operators are continuously trying to strategize and retain their competitive positions, and are partnering with delivery channels and digital platforms to drive incremental sales. Further, with the growing clout of internet, digital innovations have become the need of the hour.

Though these strategic efforts will help rev up sales, margins will continue to be under pressure due to high operating costs. Further, sales-building efforts such as promotional activities and a convincing pricing strategy are detrimental to the industry operators’ margins. The industry has also been struggling with lower foot traffic.

The Zacks Retail – Restaurants industry currently carries a Zacks Industry Rank #165, which places it in the bottom 35% of more than 250 Zacks industries. Year to date, the industry has witnessed growth of 1.6% compared with the S&P 500’s increase of 7.7%. There are certain underperforming stocks in the industry that are limiting its overall growth potential. Papa John's International, Inc. PZZA is one such stock, which is struggling be in investors’ good books. Year to date, this Zacks Rank #5 (Strong Sell) stock has witnessed a sharp decline of 17.7%.

What’s Giving Papa John's a Tough Time?

Apart from witnessing a consistent decline in revenue trends, Papa John’s recently came under negative spotlight after its ex-CEO, John Schnatter was publicly denounced for using racist term.

Decline in both top line and bottom line over the past few quarters has been a concern for Papa John’s. The downside can be attributed to dismal domestic company-owned restaurant sales and fall in North America commissary sales on weak volumes. Further, dismal comps over the past few quarters are also hurting the company’s performance. Comps had declined 6.1% in both the first and second quarter of 2018.

In the past 60 days, the Zacks Consensus Estimate for 2018 and 2019 has declined 21.6% and 25.6% to $1.81 and $1.92, respectively. Moreover, the consensus estimate for third-quarter 2018 has also moved down 57.1% to 24 cents.

With its share price plunging and estimates witnessing downward revisions, it would not be viable to keep this stock in your portfolio, at least for the time being.

Here, we have highlighted four stocks in the Retail – Restaurants space for investors, on the basis of their Zacks Rank, sound Zacks Consensus Estimate revisions and solid fundamentals.

4 Promising Picks

BJ's Restaurants, Inc. BJRI, which owns and operates casual dining restaurants in the United States is a solid bet. Shares of this Zacks Rank #1 (Strong Buy) company has witnessed a sharp gain of 105.5% year to date. Moreover, the company has an impressive long-term earnings growth rate of 15.3%. In the past 60 days, estimates for 2018 and 2019 have moved up 6% and 7.4% to $2.12 and $2.33 per share, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dine Brands Global, Inc. DIN, a full-service dining company, has a Zacks Rank #2 (Buy). The company’s shares have surged 82.1% year to date. Its earnings have surpassed the Zacks Consensus Estimate in each of the trailing four quarters with an average of 8.1%. In the past 60 days, estimates for 2018 and 2019 have been revised upward by 4.9% and 11.1% to $5.36 and $7.31 per share, respectively.

Darden Restaurants, Inc. DRI, which owns and operates full-service restaurants in the United States as well as Canada through its subsidiaries, carries a Zacks Rank #2. The company’s earnings have surpassed the consensus mark in each of the preceding four quarters with an average of 3.1%. In the past 60 days, estimates for 2018 and 2019 have moved up 0.2% each to $5.50 and $6.04 per share, respectively.

Ruth's Hospitality Group, Inc. RUTH, a leading fine dining steakhouse company in the United States, holds a Zacks Rank #2. The company has an impressive long-term earnings growth rate of 14.3%. Further, it has delivered positive earnings surprises in two of the three trailing quarters. The Zacks Consensus Estimate has trended upward by 2.2% and 0.7% for 2018 and 2019, respectively, over the past 60 days.

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