Editors' pick: Originally published Oct. 24.
Why are investors feeling so pessimistic about this stock?
The answer is simple.
For months, analysts have been warning of a restaurant recession of unprecedented scale. And across the board, sales at some of the country's most beloved chains have been tepid, at best.
On Friday, McDonald's, one of the world's most iconic restaurant brands, reported a third-quarter year-over-year revenue decline of 3%.
And Paul Westra, a senior analyst with Stifel Financial, has downgraded 11 of the most popular restaurant stocks, from troubled Chipotle Mexican Grill to the healthier Panera Bread.
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Americans just aren't eating out like they used to. Grocery prices are low, while restaurant prices have increased, making it cheaper to stay in and cook.
Additional pressures include increased competition as small restaurant chains crop up across the country, as well as the increasing popularity of do-it-yourself meal kits.
Restaurant Brands International, which operates the Burger King and Tim Horton chains, reported third-quarter earnings of $1.54 billion or 36 cents a share. Adjusted earnings came in at 43 cents a share, which beat the consensus estimate of 41 cents a share.
However, U.S. sales were soft, rising just 1.7% at Burger King locations across the globe, versus a 6.2% increase a year earlier. And Tim Horton saw sales growth of just 2%, compared with 5.3% a year earlier.
Meanwhile, revenue for the entire company was $1.08 billion, a big miss from the $1.39 billion analysts had expected.
The industry is clearly seeing a downward shift in restaurant chain sales. This could very well be the restaurant recession that Westra and other analysts have been predicting.
Investors should be careful when picking stocks in this sector.
So far, the companies most unaffected by the downturn have been pizza delivery chains such as Domino's Pizza and coffee and doughnut giant Dunkin' Donuts, which is owned and operated by Dunkin' Brands. These stocks have registered solid returns this year, while other restaurants have lost their sizzle.
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