Many Wall Street analysts fear a recession and its impact on the companies in its sector. Nick Setyan, managing director at Wedbush Securities covering the restaurant sector, does not.
He explained his stance on PreMaret Prep Plus on Wednesday and shared a few picks and a pan.
How Can A Recession Be Good? Setyan began the interview by stating “a recession could be the best thing ever to happen for restaurants right now, especially based on what the market has already priced into these stocks.”
In his opinion, “the top line is slugging along and inflation is continuing; we need something to break the back of inflation.” He added: “comps are still good, but with food cost inflation at 17-20%, on top of labor inflation, they can raise prices 7-8%, but their margins are still getting crushed.”
He concluded: “There is no light at the end of the tunnel without demand destruction.”
Setyan's Bullish Picks: Chipotle Mexican Grill CMG: Besides being his favorite restaurant to eat at, the issue is looking tasty at its current level. Setyan has an Outperform rating with a $2,000 price target.
He cited the company as “being a pure market share gainer in the restaurant space.” In addition, “the company has a strong digital mix at 50%, as opposed to a few years ago at 20%."
He went on to say that makes for “more much efficiency in the stores.”
Also, the company “has positioned itself as a healthy brand with fresh ingredients.” Finally, the company offers higher wages and as a result attracts better employees, he said.
Dine Global Brands Inc. DIN: Setyan has the owner of the Applebee’s and IHOP franchises at an Outperform rating and an $80 price target. Setyan stated: “The reason I like them is that the company is 100% franchised.”
He continued: “Franchises are a bit more insulated in an environment when you have top and bottom-line pressure.”
More importantly, the company “generates a ton of free cash flow, which can help aid any cap-ex needs by buying back shares.”
Finally, it is “trading at 10% of its free cash yield. That is much better positioned than it was pre-COVID.”
Bearish: For Starbucks Corp SBUX, Setyan has a Neutral rating and $78 price target.
He has two primary concerns regarding the company. To begin with, the company will be “going up against very tough comps in North America, with the headwinds rising food costs and labor.”
He added: “the other component is China giving the current geopolitical risks, it is just not the same place to do business as it was five or 10 years ago.” He added: “there is going to be multiple contraction with respect to the valuation according to future earnings.”
Photo via Shutterstock.
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