The quick-service industry has become the go-to lunch option for corporate bros in Midtown - but could the industry also provide solid investment opportunities? Take Shack Shack: from a humble hot dog cart in Madison Square Park in 2001 to a global chain with 200+ locations, nearly $1 billion in annual revenue, and a market cap exceeding $3 billion. So chances are if you started investing in the Shake Shack craze when it was still just a standalone food cart, you probably wouldn’t still be working in banking.

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Top QSR Stocks

Intro

The iconic chains that used to dominate New York’s Midtown, Chicago’s Loop, and San Fran’s Financial District are leveraging the rise of remote and hybrid work for growth - they’re expanding into the suburbs and building out their online ordering capabilities. And despite a barren IPO market in 2023, the industry has provided a glimpse of hope to investors. Cava successfully went public last month, and Panera and Fogo de Chão are also eyeing public offerings.

This week we’re giving you the rundown of four quick-service stocks we’re keeping an eye on. We’ll look at America's signature fast-food turned real-estate corporation McDonald’s, all the way through Cava, the latest fast-casual chain to go public.

1. McDonald’s ($MCD)

Overview

Kicking off our list is none other than Ronnie’s Steakhouse - the legendary food chain that operates over 40,000 locations in about 120 countries. McDonald's first location opened along Route 66 in California in 1940. And the chain rose to prominence and became an American cultural icon during the economic boom of the 1950s and 1960s. Now? McDonald’s is such a global institution that some economists have even developed the Golden Arches Theorem - no two countries with McDonald’s franchises have ever gone to war with each other.

But how did McDonald’s become the benchmark for the rest of quick-service chains? It’s all about the business model, and McDonald’s perfected it. The McDonald brothers realized customers wanted their food as quickly as possible - and they built the most efficient system possible. And when the McDonalds brothers sold the company to businessman Ray Kroc (for $2.7 million in 1961), he focused on the company’s franchise model - through buying up properties and leasing them out to franchise owners, the company can collect on rents and hedge against a downturn on consumers’ fast-food spending.

QSR Catalysts

Investors love McDonald’s because the chain is relatively inflation-proof. Yes, during a recession we could see budget-conscious Americans cut out their $20 Sweetgreen salad. But with the average Big Mac retailing at $4.50 as of 2023, McDonald’s is able to rake in sales even when consumer spending dries up. 

During the Great Recession, McDonald's stock posted just a 4% loss between December 2007 and September 2009 (the S&P 500 was down 30% during this time). And McDonald’s stock posted just a 1% loss in 2022 when the S&P was down over 19%.

And McDonald’s is still staying true to the company’s legacy of making ordering as efficient as possible. McDonald’s is investing in technology that reduces friction points, and last year 35% of the company’s sales came from digital channels like mobile apps, online delivery, and kiosks.

And finally, the company has a long-term goal of converting 95% of all locations into franchise-owner restaurants. While McDonald’s food sales are low-margin, its real estate business is not. Because of its franchise model, McDonald’s essentially enjoys similar margins to a premium fine-dining restaurant, and investors love that.

Investing in McDonald’s isn’t without risk, however. As Americans become more health-conscious, McDonald’s reputation has taken a hit. And with competing fast-casual chains labeling themselves as healthier and higher-quality alternatives to McDonald’s, the chain can’t simply raise prices or customers could go elsewhere.

Key Figures (as of 7/23/2023)

• Current Price: $295.61

• Median Target Price (34 analysts): $322.37 (9% premium)

• Rating: 20 Buy, 5 Overweight, 9 Hold

• Revenue: $23.41B (TTM)

• Operating Margin: 45.81%

• Market Cap: $215.8B

• EV / NTM EBITDA: 22.4x

2. Chipotle, Inc. ($CMG)

Overview

McDonald’s perfected the fast-food business model and transformed itself from a burger shop on Route 66 to a $200 billion company. But McDonald’s hasn’t been without its controversy. As Americans became more health-conscious over the past few decades we’ve learned one of the worst-kept secrets - McDonald’s actually is pretty bad for you.

But restaurant operators and ambitious chefs started to wonder - was there a way to capitalize on Americans’ desire for fast, efficient food while putting a ‘healthy’ spin on it?

That’s where Chipotle comes into play. Founded in Denver in 1993 by a young chef in his 20s, Chipotle has grown into the gold standard for the fast-casual industry. Chipotle markets itself as providing ‘real food’ - after all, we don’t really know what’s in a McDonald’s burger. And by building an image of being fresh, organic, and healthy, Chipotle’s able to get away with charging significantly more than McDonald’s.

QSR Catalysts

Investors are excited about the 7,000 U.S. locations target that Chipotle’s management set (Chipotle would essentially need to double the number of locations it has as of July 2023). Analysts think Chipotle can double its amount of locations in approximately eight years.

And Chipotle's management has made it a point to expand the company's operating margin. The company's operating margin hovered in the single digits for most of the pandemic but has climbed steadily in 2021 and 2022 to about 15%. It’s great news for the company as it provides them with capital to reinvest and reach their growth targets.

Key Stats (as of 7/23/2023)

• Current Price: $2,098.87

• Median Target Price (33 analysts): $2,223.30 (6% premium)

• Rating: 20 Buy, 3 Overweight, 10 Hold

• Revenue: $8.98B (TTM)

• Operating Margin: 15.17%

• Market Cap: $57.9B

• EV / NTM EBITDA: 36.6x

3. Sweetgreen ($SG)

Overview

Sweetgreen was founded in 2007 in Washington, D.C. by a group of Georgetown grads just three months after they graduated. As of July 2023, the salad chain is fast-growing - it has 158 stores in 13 states. The salad chain IPO’d in November 2021.

Sweetgreen has made two unique bets that we’re keeping an eye on. The first? Sweetgreen launched a paid-membership program in April 2023 called Sweetpass. For $10 a month, Sweetgreen members get $3 off every order as well as delivery perks and unique menu items. Sweetgreen is the first fast-casual company to try out a paid-membership program, so we’re watching to see how it pans out.

Sweetgreen also launched its first automated location in Naperville, IL (a suburb of Chicago). The kitchen uses robotic technology and the hope is that the automated store cuts down on labor costs and enhances the customer experience.

It’s a little too early to tell if the robotic kitchen will make ordering more efficient - Naperville customers say the concept was so popular that lines went out the door. But it’s only a matter of time before a fast-casual chain rolls out an automated kitchen in Midtown Manhattan or Chicago’s Loop - there’s a good chance Sweetgreen already has the capabilities needed to do so.

QSR Catalysts

Sweetgreen is in growth-mode, and the chain is planning 30-35 new restaurant openings in 2023. This is a similar cadence to 2022. But let’s be real - it’s a challenging macroeconomic environment to open scores of new restaurants, and Sweetgreen is essentially betting on itself.

In Q1, Sweetgreen grew its total revenue to $125.1 million, up 22% from the period the year prior. And Sweetgreen is expected to increase its operating margin to 15-17% in 2023 - this could indicate the company has strong bargaining power with its customers and suppliers.

Key Stats (as of 7/23/2023)

• Current Price: $15.28

• Median Target Price (9 analysts): $15.00

• Rating: 5 Buy, 4 Hold

• Revenue: $592.6M (TTM)

• Operating Margin: NM

• Market Cap: $1.70B

• EV / NTM EBITDA: NM

4. Cava ($CAVA)

Overview

Cava is also a DC-based chain that took NYC by storm. The parallels between Cava and Chipotle are hard to ignore, with many analysts calling the Mediterranean chain the ‘next Chipotle’. Cava specializes in salads, bowls, and pitas. And the company may have viral TikTok videos to thank for becoming a household name.

QSR Catalysts

Cava reported a 13% jump in full-year revenue in 2022 ahead of its IPO filing. And the chain even touts a "scalable data-driven growth engine" to investors. Jeffries thinks Cava could match Chipotle’s target of opening 7,000 stores, and the chain wants to open drive-throughs and expand its footprint in all regions across the country.

But, right now, Cava isn’t profitable. While investors are hoping the chain can grow into profitability, there are certainly risks entailed with investing, especially given how the chain doubled during its IPO.

Key Figures (as of 7/23/2023)

• Current Price: $48.78

• Median Target Price (9 analysts): $45.86

• Rating: 5 Buy, 1 Overweight, 3 Hold

• Revenue: $608.2B (TTM)

• Operating Margin: NM

• Market Cap: $5.5B

• EV / NTM EBITDA: NM

5. ETF - AdvisorShares Restaurant ETF ($EATZ)

Bloomin’ Brands include Outback and Bonefish Grill. RBI includes Tim Hortons, Burger King, Popeyes, and Firehouse Subs. Arcos Dorados owns the master franchise of McDonald’s in 20 countries across Latin America, and Darden Restaurants owns Olive Garden, Ruth's Chris, and The Capital Grille.

Key Stats (as of 7/23/2023)

• Inception Date: 4/20/2021

• Expense Ratio: 0.99%

• AUM (Net Assets): $2,660,065

• 1-Year Return: 30.95%

• Return Since Inception: (4.72%)

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