Top Restaurant Picks Cava, Wingstop to Lead Sales Growth by 2026

Key Takeaway

• U.S. restaurant industry shows recovery with 53% of food spending now outside the home, indicating robust demand for dining out.
• Restaurant group's sales growth expected to accelerate through 2026, surpassing all sectors except industrials; however, EPS growth will lag due to rising costs.
• Cava Group Inc. and Wingstop are top picks for significant sales growth through 2026, with majority buy ratings from analysts.

Restaurant Industry Performance

The U.S. restaurant industry has faced significant challenges over the past five years, particularly during the COVID-19 pandemic. Despite these hurdles, the sector is showing signs of recovery and potential growth. According to a recent Wall Street Journal article, restaurants have become highly desirable tenants for retail landlords, reflecting record revenue levels and a shift in consumer spending habits. The U.S. Agriculture Department’s Economic Research Service reports that 53% of U.S. consumers' food spending is now done outside the home, a record high and a 10 percentage point increase from 2003.

This trend indicates a robust demand for dining out and takeout food, which is beneficial for retail landlords with successful restaurant tenants. However, for stock market investors, the implications are more nuanced. A screen of 36 publicly traded restaurant stocks listed on U.S. exchanges, drawn from the holdings of the Vanguard Russell 3000 exchange-traded fund, reveals varied performance metrics.

Financial Metrics and Growth Rates

When comparing forward price-to-earnings (P/E) ratios and estimated compound annual growth rates (CAGR) for sales and earnings per share (EPS) for the S&P 500 restaurant industry group with those of the 11 sectors of the S&P 500, the restaurant group's weighted valuation is higher than all sectors except for information technology and consumer discretionary. The restaurant group's estimated five-year sales growth pace has slightly trailed the IT and communications sectors but has outpaced the full S&P 500. Looking ahead, the restaurant group's sales growth is expected to accelerate slightly through 2026, surpassing all sectors except industrials.

However, the restaurant industry's EPS growth is expected to lag behind most sectors through 2024, reflecting profit-margin pressures due to rising costs. The total return for the S&P 500 restaurant group, including dividends reinvested, was 51.7% over the past five years, compared to 101.1% for the full S&P 500.

Comparable-Store Sales and Profit Margins

A closer look at 27 restaurant companies covered by at least five analysts polled by FactSet shows that only 10 reported increased comparable-store sales for their most recent fiscal quarters. Notable companies include McDonald's Corp. (MCD), which reported a comparable total sales growth rate of 1.9% and a higher growth rate of 2.5% for U.S. stores. For the other companies, comparable-store sales growth rates varied, with some showing improvements in gross and operating margins.

For instance, Kara Sushi USA Inc. (KRUS), Cava Group Inc. (CAVA), and McDonald's saw their profit margins narrow. Among the 27 companies, consensus sales and EPS estimates through 2026 are available for 24. Cava Group Inc. tops the list for expected sales growth from 2024 through 2026, while Wingstop ranks third. Interestingly, Starbucks Corp. (SBUX) is also on the list of expected rapid growers despite reporting a dismal set of quarterly numbers on April 30.

Analysts' Ratings and Price Targets

Among U.S.-listed restaurant companies covered by at least five analysts polled by FactSet, 12 have majority buy or equivalent ratings. These companies are sorted by the 12-month upside implied by the consensus price targets. This list includes companies like Cava Group Inc. and Wingstop, which are expected to see significant sales growth in the coming years.