Thanks to depressed foot traffic, restaurant stocks have underperformed the market over the past 12 months. And Morningstar expects the industry to experience a couple of years of slowing growth. In this tough environment, we think the largest chain restaurants are well-positioned to grab market share from smaller chains and independents. With an increase in promotional activity, Morningstar prefers brands in the restaurant industry with strong loyalty programs that can personalize offers instead of engaging in across-the-board discounting. And we think brands with cost advantages that can draw in consumers with good value for the money are attractive, too.
Most restaurant stocks Morningstar covers today look fairly valued. Yet two restaurant stocks of wide-moat companies with strong loyalty programs and cost advantages look undervalued today. In fact, both of these stocks rarely trade at such large discounts to our fair value estimates. These are great stocks to buy today.
2 Wide-Moat Stocks Trading at Rare Discounts
Our first top undervalued pick is the largest global name in the restaurant industry: McDonald’s. We expect comparable sales to exceed 3% over the next five years as the company generates leverage from its massive global loyalty program of 150 million members—and counting. These customers spend twice what nonmembers spend and are forecast to grow to 14% of total customers in 2028 from just 8% today. We think McDonald’s stock is worth US$312.
Our second undervalued pick in the restaurant industry is another familiar name, Starbucks. The largest global coffee chain provides exposure to a quickly growing category and two attractive end markets: the United States and China. Morningstar thinks investors overestimate unionization threats and the company’s sensitivity to China, with one U.S. store worth 3.4 stores in China. We’re forecasting double-digit earnings per share growth for the coming decade. We think Starbucks stock is worth US$105.
