2019 Restaurant Group Outlook

The macroeconomic drivers for the restaurant industry remain healthy for 2019 with strong jobs and wages in the U.S., incremental tax refunds, and lower gas prices. However, these tailwinds are being partially offset by high labor costs, and as such Oppenheimer analysts remain selective in stock ideas for 2019. The Firm upgraded Wendy’s (WEN) based on the view that Street earnings and free cash flow expectations through ’20 set up a meet or beat scenario relative to consensus expectations. Other top stock picks are highlighted, including Restaurant Brands International (QSR), Domino’s Pizza (DPZ), and Darden (DRI) -- given idiosyncratic drivers and attributes.

With that said, here is a closer look at the restaurant industry themes for 2019:

• The macro backdrop remains healthy given strong job gains and wage growth, but industry Same-Store Sales (SSS) face its toughest comparisons in years.
• Earnings upside is extremely difficult to identify. Stock-by-stock Street estimates do not reveal any obvious earnings upside opportunities.
• Operating and capital costs are elevated across the industry including expenditures for delivery, remodels, technology, as well as wage and food cost inflation pressures.
• System-sales growth represents main earnings and valuation driver for franchise-models. With financial engineering for the franchised group behind us, the fastest and most dependable system-sales growers command the best valuations.

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