The restaurant stocks to own in 2024, according to Wells Fargo

While the restaurant category is less discretionary, with fewer recovery stories and a more difficult comp backdrop, analysts at Wells Fargo recommend leaning on names with share gain opportunities, unit growth, and idiosyncratic same-store sales and margin levers, the firm told investors in a sector preview note.

2024 PLAYBOOK: McDonald’s (MCD) was named as Wells Fargo’s top idea, with the firm noting the stock has both offensive and defensive aspects. The firm believes McDonald’s has multi-year growth levers and valuation wiggle room. With big picture pressures now well understood, the firm anticipates the McDonald’s story will get “a lot cleaner” in 2024.

The firm also views Chipotle Mexican Grill (CMG) positively, noting it has more traffic growth, throughput levers, and more white space than anyone. Chipotle was “far and away” the best-performing restaurant stock in 2023 and the firm believes there is enough incremental power in 2024 to drive further upside.

Starbucks (SBUX) was named as the firm’s top idiosyncratic idea, arguing that while trends are slowing and sentiment is worsening, the firm sees double-digit percentage EPS growth as intact. The firm sees enough long-term growth, margin, and throughout levers to justify that level of EPS growth for the foreseeable future, Wells Fargo tells investors.

Meanwhile, Yum! Brands (YUM), Restaurant Brands (QSR), and Domino’s Pizza (DPZ) where each named as stocks the firm would be looking for better entry points to enter. Wells Fargo downgraded Yum! Brands to Equal Weight from Overweight with a price target of $135, down from $150. The firm says its bullish 2023 thesis, predicated on accelerating comps, units and margins, has largely played out. Looking to 2024, consensus estimates create a relatively high bar amid slowing recent channel checks and a more limited slate of catalysts, the firm argues.

2023 was “pivotal” for Restaurant Brands’ turnaround. The firm views 2024 as another year of progress, but valuation discipline is holding it back. Meanwhile, Domino’s Pizza (DPZ) was among the better performing restaurant stocks in the second half of 2023. However, higher 2024 expectations may limit upside, the firm contends.

2024 EXPECTATIONS: The firm notes several expectations for the upcoming year. Restaurant comps will likely decelerate, but the firm expects concepts with proven near-term momentum, such as Chipotle, Starbucks, and McDonald’s, are well positioned for this backdrop. Further, with commodity pressures beginning to abate, the firm expects companies’ pricing holds should translate to higher restaurant margins for operators in the coming year, at least initially.

On an absolute basis, current restaurant valuations seem reasonable. Wells Fargo is not expecting broad valuation expansion for the group this year.

Finally, the firm anticipates consumer spending will continue to be resilient in 2024. While the consumer already feels stretched, Wells Fargo does not expect any meaningful change in underlying demand this year.

KEY THEMES: Wells Fargo listed seven key themes heading into 2024. The first is the firm anticipates restaurants will see moderating check growth as companies plan for smaller price increases and the consumer continues to feel pressure. Next is commodity inflation is moderating and the firm anticipates supply chain margin improvements in 2024 via lower commodity prices.

The third theme is that while restaurants have “finally” returned to normal staffing levels and elevated trading costs are now subsiding, the industry continues to face labor cost inflation and statutory wage increases. Wells Fargo expects most restaurant companies to contend with mid-single digit percentage wage increase again in 2024.

The next theme is that consumers are now gravitating toward value, and the firm’s pricing study shows McDonald’s and Chipotle are well positioned for this. Fifth is with staffing levels and restaurant sales normalizing, Wells Fargo sees growth opportunities coming from optimizing operations, such as increasing throughput during the busiest hours. The firm is most optimistic on the throughput opportunities at Chipotle, Starbucks, and McDonald’s.

Another theme is that weight loss drugs, such as GLP-1 drugs like those introduced by Eli Lilly (LLY) and rival Novo Nordisk (NVO) , remain a spot of controversy and pose new questions for food consumption, the firm notes. However, while the long-term risk is worth monitoring, Wells Fargo is not overly concerned today and views any GLP-1 dislocations as buying opportunities.

Lastly, China continues to be an important driver for many restaurant names, especially with Starbucks and Yum, and remains an important long-term component of the industry’s outlook, but investors are giving much less credit for China growth today than in the past.