Many consumer stocks are in a hole, pushed down by belt-tightening Americans living with the uncertainty of whether a recession is on its way. Restaurants have been pummeled, too, although Goldman Sachs still thinks a couple are worth buying.
Shoppers undoubtedly will keep watching their pennies, keenly aware of the economy slowing and inflation running at a 40-year high. Indeed, more analysts are arguing that certain segments of the discretionary sector will behave like they are in a slump, regardless of what the numbers show.
Goldman Sachs analyst Jared Garber argued much the same Monday, writing that “whether we enter a technical recession or not is less relevant (in our view), as economic growth decelerates and inflation pressures mount.”
His conclusion led him to double upgrade Yum! Brands (ticker: YUM) to Buy from Sell, and to remove Chipotle Mexican Grill (CMG) from Goldman’s Conviction Buy list, even though he remains bullish on the stock.
Garber lifted his price target by $10 to $135 on Yum, which “boasts one of the strongest unit growth algorithms” among its peers—going so far as to not only reinstate its long-term growth targets in the second quarter of 2021, but raise them. He noted that the company can drive restaurant growth ahead of its long-term 4%-to-5% goal over the next two years.
There are other catalysts for the stock as well, he wrote, including its improving digital footprint, a strong cash flow that supports a dividend yield approaching 2%, and the benefit of increased sales in China, whenever that nation fully reopens from the pandemic.
As for Chipotle, Garber kept a Buy rating, although he did lower his price target to $1,720 from $1,995. He pointed out that Chipotle is still “one of the strongest restaurant growth stocks,” with demonstrated pricing power and same-store sales growth bolstered by ongoing menu innovation as well as one of the best digital platforms among restaurants.
Still, he wrote that a tougher backdrop, along with higher costs for both labor and food commodities, could weigh on margins.
Other analysts also have curtailed their expectations for restaurants. Although nearly three-quarters of analysts tracked by FactSet are bullish on Chipotle, earnings per-share estimates for the quarter and full year have come down in the past month.
Only 13 of the 30 analysts covering Yum have a Buy rating or the equivalent, although estimates haven’t moved much in the past month.
In midday trading Monday, Chipotle was up 2.7%, to 1,329.20, and Yum was 1.1% higher to $119.47.
Write to Teresa Rivas at [email protected]
Credit: www.marketwatch.com /