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Morgan Stanley’s data-driven review of the restaurant space to start 2023 included some high-profile rating changes.
By taking over John Glass’s hedge of restaurant stocks, stock analyst Brian Harbor adjusted the ratings across the board. industry amid what he hopes will be a more difficult 2023. These changes included an update to Domino’s Pizza (New York Stock Exchange:DPZ) and Portillo (PTLO) to Overweight of Equal Weight and a discount from Chipotle Mexican Grill (NYSE:CMG) to Weight Equals Overweight.
Harbor noted that a slowdown in visits is expected, with consumers increasingly focused on value.
“However, across all segments, more consumers are paying attention to price, making the value proposition increasingly important,” he advised clients Tuesday. “Consumers expect to visit casual dining restaurants on average 4% less over the next six months versus a decline of just 1% for quick service, which aligns with our expectations that customers will turn to more focused options. to value”.
Harbor added that fast casual, pizza and coffee restaurants are showing positive intentions. He attributes this to both the strong perceived value of brands like Domino’s (DPZ) and Portillo’s (PTLO) and the decline of full-service restaurants as consumers tighten their belts.
By contrast, Chipotle (CMG) was near the bottom of value perception surveys, adding to concerns about foot traffic trends.
“However, in the short to medium term, we think it will be more difficult for the stock to outperform as we believe the traffic and pricing concerns have merit and will be more difficult to refute over multiple quarters with the possibility of increased price sensitivity, and our top line estimates are below the consensus reflecting this,” Harbor advised clients. “Extending soft to higher end customers and the food delivery channel could be a challenge in fast casual, and it could be for CMG as well.”
Lowered the stock price target to $1,664 from the previous $1,847 along with the downgrade and removal of top pick status.
Hmm! Instead, Brands (YUM) was named a top pick for 2023. A rebound in China and the strength of Taco Bell were noted as key factors underpinning optimism in the name. It also ranks at the top of the bank’s defensive restaurant picks along with McDonald’s Corporation (MCD). Hmm! Brands’ (YUM) price target was raised to $155 from $140 previously.
Completing the coverage changes, Sweetgreen (SG) and Krispy Kreme (DNUT) were downgraded to Equal Weight from previous Overweight ratings and Shake Shack was cut to an equivalent rating of Sell. Harbor explained that unit growth, margins and cash generation metrics add to foot traffic and value proposition trends that figure prominently in his rating adjustments.
Read more about Cheesecake Factory’s recent Citi downgrade.
