These 4 'Fast-Casual' Restaurant Stocks Are Beating Chipotle

Americans are growing more concerned about their health, which means that quick-service restaurants or fast-food chains, synonymous with greasy burgers and cheese fries, have to think on their feet.

Not only do McDonald's, KFCBurger King and Wendy's have to compete with one another, now they have to appeal to customers who are flocking in droves to "fast-casual" restaurants such as Shake Shack and Panera and, until its recent food contamination scandal, Chipotle (CMG) . 

Fast-casual restaurants exemplify the sort of trend you should tap into for long-term wealth building. "Fast-casual" typically marries the concept of "fast" in fast food and its convenience, with a "casual" dining experience serving freshly prepared and superior-quality food. Not only are these far healthier options over traditional fast-food offerings, but fast-casual restaurants also use sustainable and responsibly sourced ingredients to increase their appeal to customers, especially millennials. 

Customers generally have to pay slightly more for meals here, but going by the numbers, they seem willing. According to Technomic, sales of the fast-casual segment grew 13% in 2014 to $39 billion versus the total restaurant industry's growth rate of 3.8%.  While fast-casual represents a small slice of the $466 billion restaurant sales pie, the food preferences of today's customers will only propel growth further. That's why the best among these food and beverage stocks belong in your retirement portfolio.

If you're an income investor, you might find appeal in the dividend aristocrat status of fast-food restaurants like McDonald's, which has grown dividends for 39 years. However, with its payout ratio at over 74% and rising pessimism amongst franchisee owners about its turnaround efforts, it wouldn't be prudent to rely on the stock for substantial total returns in the long run.

McDonald's and other fast food giants are increasingly watching their market share being gobbled up by these "fast-casual" restaurants. Let's look at some of the major stocks in this industry, and which ones are good moneymaking bets over the long haul.

So, below are four companies that are challenging Chipotle for dominance in this space that you should consider investing in. First, a look at Chipotle: 

CMG Chart CMG data by YCharts

Chipotle Mexican Grill (CMG)

One of the premier names in this industry segment, Chipotle was credited with starting the fast-casual phenomenon and today has over 2,000 stores. Chipotle became synonymous with quality by using locally-sourced fresh ingredients and meat from animals that were humanely raised and naturally fed.

However, in 2015, the company was marred by the outbreak of Norovirus, E. coli, and salmonella found in its food, which caused at least 55 people in 11 states to become sick. As a result, 4Q comparable restaurant sales dipped 15% year over year (YoY) and the stock price plummeted over 30% over the last six months. With a Price/Earnings to Growth ratio at 4.14x, Chipotle is far above the industry average of 1.69x, making it an expensive stock to buy.

While the investigation is closed and the Centers for Disease Control and Prevention say that the outbreak is likely over, Chipotle now has to regain market share and even market cap.

For now, you should avoid this particular stock. Meanwhile, these fast-food restaurants are eating Chipotle's lunch.

EAT Chart EAT data by YCharts

1. Brinker International (EAT)

Dallas-based Brinker International operates Chili's Grill & Bar and Maggiano's Little Italy brands. They are a little more expensive, but a strong competitor to CMG. Brinker's $106.5 million acquisition of Pepper Dining Holding Corp. made it the owner of 103 franchised Chili's Grill & Bar restaurants, which resulted in improved sales and profits for Brinker in the second quarter.

While its comparable sales were down 2.6% YoY (vs. a 3.7% increase last year) and traffic was down 3.9% (vs. a 1.7% increase last year) YoY during the quarter, Brinker still enjoys tailwinds.

The chain won't only benefit from being the alternative to customers for its Mexican fare, but also from low oil prices, which leaves customers with greater disposable income to spend on food.

This year, analysts expect that the chain's earnings will grow 15.5%, trumping the industry's 12.9%. At 13.71, Brinker's trailing 12-month price-to-earnings (P/E) ratio is also lower than the industry's 14.17 and the S&P 500's 22.74. We suggest you bite into EAT, which is a great stock for your retirement needs.

SBUX Chart SBUX data by YCharts

2. Starbucks (SBUX)

Unlike Chipotle, Starbucks is keeping both its health-conscious customers and return-focused investors happy.

The coffee-chain has expanded into tea, beer, and wine, increasing its range of offerings for customers. Earlier this year, the company also pledged to "reduce added sugar in indulgent drinks by 25% by the end of 2020" in an attempt to make its offerings healthier.

Starbucks has grown revenue by 10%-15% per year for last three years, helped by its focus on brands such as Teavana, La Boulange, and Evolution Fresh. The fact that it has consistently grown dividends apart from growing from under a dollar to $57 today makes it a darling of investors and a popular fixture in retirement portfolios.

To further entice tech-savvy millennials, Starbucks rolled out its Mobile Order & Pay service for customers to reduce their waiting time in the lines. The strategy has been a success: Transactions through the digital app counted for 22% of total store transactions in the month of December.

With technological advancements and a bigger bouquet of products, analysts are bullish on the prospects of the company and its stock price. Analysts with a 12-month median price target on the stock expect a 21% upside to the stock from current levels.

You see Jim Cramer on TV. Now, see where he invests his money and why Starbucks stock is a core holding of his multimillion-dollar portfolio. Want to be alerted before Jim Cramer buys or sells SBUX? Learn more now.

DNKN Chart DNKN data by YCharts

3. Dunkin' Brands (DNKN)

Parent of doughnut-company Dunkin' Donuts, Dunkin' Brands may be synonymous with sugary and indulgent desserts, but the Baskin-Robbins owner is also trying to remain relevant among customers who increasingly prioritize health.

Dunkin' has introduced more breakfast sandwiches as healthier snack options and is also looking to improve customer experience with faster checkouts, especially during rush hour. It also aims to capitalize on growth opportunities in emerging markets and has been opening more stores abroad.

In addition to maintaining its focus on health, like Starbucks, Dunkin's plans for food delivery and mobile ordering services will help it achieve incremental earnings growth benefits in the coming years.

For the past four quarters, Dunkin' has beat earnings per share (EPS) estimates and reported 2015 EPS at $1.93, an 11% increase from 2014. While earnings estimates for the current year stand at $2.19 with 13.5% hike, next year too, analysts expect EPS to grow in double digits to $2.43. Dunkin' is another growth stock winner.


CHUY Chart CHUY data by YCharts

4. Chuy's Holdings (CHUY)

Another direct competitor to Chipotle, albeit a small-cap company, is Austin, Tx.-based Chuy's Holdings. With a market cap of under $500 million, CHUY's potential to grow has only been boosted by the mess at Chipotle.

The company has three-year average revenue growth of 23.4%, nearly triiple the industry's 8.3% average. According to its most recent earnings report, Chuy's recorded quarterly revenue growth of 15.3% on year and net income growth of 31%.

Chuy's is clearly benefiting on two fronts, the savings on gasoline prices, 80% of which is spent at restaurants, and the loss of business at Chipotle.

Despite its stellar growth and 20.5% rise in stock price over the last one year, Chuy's PEG ratio at 1.3x is lower than the industry's 1.59x and the S&P 500's 1.43x figure. The stock is expected to further rise by 20.5% over a 12-month periods, according to Thomson Reuters analysts estimate. You can confidently add this stock to your investment menu.

Are you making the right investment moves for your retirement, or are you blowing it by making all-too-common money mistakes? There are crucial steps that you should be taking now, to build wealth over the long haul. To find out whether you'll have enough money in your later years, download our free report: Your Ultimate Retirement Guide.



This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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