To The Moon

Since the outbreak of the pandemic, there have been some changes in the dining-out landscape in North America. On one hand, food delivery has become widely popular and related businesses have changed consumer habits to some extent. On the other hand, inflation has affected all aspects of life, leading to an increase in dining-out costs.

Food delivery services that emerged during the pandemic have changed consumer behavior and their companies' performance continues to improve.

• $Uber(UBER)$ Uber's food delivery business had a booking volume of $14.315 billion USD in Q4 2022, exceeding $13 billion USD for five consecutive quarters and achieving profitability (EBITDA profit margin returning positive). Although its year-on-year growth rate is not as high as that of 2020-2021, its overall scale is becoming more stable.

  

• Another food delivery company $DoorDash, Inc.(DASH)$ DASH also shows similar characteristics with a total order volume reaching $14.446 billion USD in Q4 2022 with a YoY growth rate of 29%, and a single quarter order number reaching 467 million orders which indicates that consumption habits are largely retained after the pandemic.

  

In addition, Food outside costs have gradually increased since late 2021 with delayed growth relative to CPI changes overall. From US CPI sub-items for dining out over recent months it can be seen that dining-out costs continue to rise and are relatively lagging behind both CPI overall growth rates and core CPI growth rates. Dining out cost YoY grew by 8.8% in March which was the highest level since the outbreak.

Which restaurant companies perform better?

More food delivery orders along with higher dining-out costs directly benefit restaurant enterprises; chain restaurants are easier than personalized chef restaurants when it comes to cost control margins profits.

Long-term performance-wise Dow Jones U.S Restaurants & Bars Index does not differ much from S&P500 index but performs better than market indices after COVID-19 due mainly two time points: rebound post-pandemic and current inflation growth period.

There are many restaurant companies in the industry, and we have compiled statistics on 11 major North American restaurant enterprises.

In terms of individual stock performance, $Jack In The Box(JACK)$ JACK and $Chipotle Mexican Grill(CMG)$ CMG rebounded the most from their lows after the pandemic with returns exceeding 220% since then. Among them, JACK has a smaller market value and greater volatility; its performance is more affected by earnings reports which gave it stronger momentum during early 2021's rebound. After entering 2022, $McDonald's(MCD)$ , $Yum(YUM)$ and CMG performed even better as they were more stable.

In terms of growth rate: large-cap stocks such as MCD, YUM and $Domino's Pizza(DPZ)$ DPZ had relatively lower growth rates at only single digits while CMG with second largest market cap maintained double-digit growth rates. Small-cap $Kura Sushi USA, Inc.(KRUS)$ KRUS, JACK and $Sweetgreen, Inc.(SG)$ still maintain over 30% growth rates.

In terms of profit margins: McDonald's leads other peers with an operating profit margin of 46.6%, followed by Yum! Brands'37%. Their models are more matured with other high-profit income sources; however they also benefit from higher customer prices during inflationary periods. Chipotle Mexican Grill (CMG) averages less than 20%, but still ahead of the industry average level of14%.

In terms of valuation: The overall P/E ratio (TTM) for the restaurant industry is currently at29 times while EV/EBITDA is at18.7 times; among large-cap companies,CMG has slightly lower P/E ratios but due to good cash flow its EV/EBITDA remains below average levels in the industry.

For mature chain restaurants like McDonald's or Yum!, cyclical changes in the industry will affect them more deeply than others.

CMG stands out among large-cap companies since its share price is relatively high so retail investors participate less frequently making institutional investors set pricing instead.

Bill Ackman from Pershing Square Capital Management has always held it as a core holding.

CMG's TTM EPS is $32.28 USD and the consensus EPS for 2023 is $41.88 USD, with a growth rate of 29.7%. Therefore, its P/E ratio will drop from52 to40 in 2023 which is more in line with the current industry average level; at the same time, its forward P/E ratio for 2024 will decrease to 33.06 times.