Should You Stay Away From Fast-Food Stocks?

There is no denying the negative impact the coronavirus pandemic has had on the food industry. Some restaurants can still deliver their food, but many others have been forced to close their doors altogether. So, it’s no surprise that in the March retail sales report, bars and restaurant sales dropped 26.5%.

Even though fast-food restaurants have more alternatives to deliver food, they certainly aren’t immune from the decline in the overall industry, as they’ve had to close their in-dining areas, too. With that in mind, let’s take a look at two major fast-food restaurant chains and how they’ve weathered the coronavirus storm.

First up is Chipotle Mexican Grill (CMG). The company was founded by a classically trained chef back in 1993. Clearly, Steve Ells wasn’t just opening another fast-food chain; he wanted to prepare real food with real ingredients in a real kitchen in a fast-food restaurant. Today, Chipotle boasts that it only uses 51 ingredients to prepare its wildly popular Mexican dishes, which are made by hand.

Now, times of crisis are when we see what a company is really made of. And based on CMG’s actions, its management is made of quality people, too. CEO Brian Niccol announced that the company increased hourly pay for its employees by 10% and expanded emergency sick leave and sick pay. CMG has also taken many precautions for customers, like tamper-evident bags and contactless, and free delivery options.

While this is great to hear, it will hurt CMG’s bottom line. For the first quarter, earnings are expected to decline 14% year-over-year to $2.92 per share. On the plus side, revenues are expected to increase 8.8% year-over-year to $1.42 billion. However, with Chipotle’s in-company app, customers have been able to order online and pick up in store for years, which has helped make their transition smoother during the pandemic.

In addition, comparable sales appear to be improving. Cleveland Research analyst Steven Gojak noted that CMG’s comparable sales fell between 5% and 10% in late March and early April, significantly better than the 20% to 25% drop they made at the start of the coronavirus outbreak.

The company does have a habit of besting analyst expectations. In fact, it has for four-consecutive quarters. For the fourth quarter, adjusted earnings per share soared 66.3% year-over-year to $2.86, up from $1.72 per share in the fourth quarter of 2018. Analysts were expecting adjusted earnings of $2.75 per share, so Chipotle posted a 4% earnings surprise.

CMG will post its first-quarter results next Tuesday, April 21, so we’ll see if the company is able to top results again.

So, does this make CMG a buy ahead of its earnings results? Well, let’s consult the Portfolio Grader I used to craft, for example, my Platinum Growth Club Model PortfolioApparently, it does, as the stock earns a solid B-rating.

While the fundamentals could use a little work, CMG earns an A-rating for its Quantitative Grade. This isn’t too surprising, given how it has more than doubled the S&P 500’s performance in April. CMG is up 24% while the S&P 500 is up 10%.

McDonald’s (MCD), on the other hand, is having a tougher time navigating the coronavirus.

From negative press all over the world to a sales falling more than 20% last month, the company has struggled. McDonald’s management stated that only 75% of its restaurants are open world-wide and most of the restaurants still open are drive-thru only.

While the drive-thru segment accounts for about 70% of MCD’s sales, 25% of its sales – and up to 40% of its profits – come from the “breakfast daypart.” But due to the coronavirus, morning commuters have all but disappeared from the roads. And while McDonald’s normally offers all-day breakfast, the company has been forced to remove it from the menu in order to “simplify operations.”

This is a big blow for McDonald’s. MCD’s total comparable sales for March fell 22.2%. The company’s past earnings history has been mixed at best.

For the fourth quarter, earnings of $1.97 per share came in 0.5% better than the expected $1.96. Revenues of $5.35 billion topped estimates by $50 million. Looking ahead to the first quarter, analysts are estimating earnings to fall 8.1% year-over-year to $1.58 per share. Revenues are expected to fall 5.2% to $4.68 billion.

Let’s see how MCD stacks up in Portfolio Grader:

As you can see above, MCD earns a D-rating for its Fundamental Grade. And while its Quantitative Grade is still a “B,” buying pressure is likely to dwindle as the company’s growth slows. MCD’s total grade is a C, making it a hold right now.

When you add it all up, CMG is the clear winner here. Not only does it have stronger fundamentals and buying pressure, but the company is taking care of its employees, too.

I’ve been recommending CMG in my Platinum Growth Club Model Portfolio for nearly a year…and this is why it remains a firm buy. Even though the company has come under pressure, the stock continues to hold up relatively well. Once the world is able to move past the coronavirus pandemic, I expect CMG to bounce back quickly.

In the meantime, while we wait for the dust to settle around CMG, there are other growth stocks with great Report Cards. Many of these companies in the large-cap arena offer dividends to boot!

I just published my Portfolio Grader 500, with the top 250 biggest buy-rated stocks…as well as the bottom 250 stocks to sell and avoid. At Platinum Growth Club, the Portfolio Grader 500 is free for members every quarter.

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