Quick-Service Restaurants Offer Safety in Multi-National Size While Casual Dining Sees Pressure, Barclays Says

Multi-national quick-service restaurants are offering safety in their size and diversity while casual dining outlets could face rising cost pressures if the economy eases further, Barclays said in a note on Monday.

McDonald’s (MCD) is the top pick for 2019, and the investment bank is overweight Burger King parent Restaurant Brands (QSR), as well as Applebee’s owner Dine Brands (DIN) and Darden (DRI), which has the Olive Garden chain.

Analyst Jeffrey Bernstein said he’s “surprised” by the strength of high-growth, “co-op” names including Chipotle Mexican Grill (CMG), Starbucks (SBUX) and Shake Shack (SHAK).

Two-year average comparable sales stabilized after easing to start the second quarter, and showed signs of regaining momentum near the close of the period, the analyst said.

“The US consumer macro (i.e. employment and confidence) remains favorable, and restaurant shares should be rewarded,” Bernstein said. “The time to play defense is now.”

Still, the outlook for costs is “challenging” with headwinds from commodities and labor and menu pricing power remaining limited. Most casual diners are expected to “reiterate or modestly temper their prudently conservative initial 2019 guidance,” he said.

The industry consensus for earnings per share growth of about 10% in the second quarter is achievable, but upside is limited, the analyst said.

For the quick-service segment, companies with multi-national operations “offer relative safety of size, liquidity, geographic diversity, and the ability to carry outsized balance sheet leverage, benefitting from a franchise model, with the focus of returning cash to holders,” Bernstein said.

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