Now that the tax law is just about a done deal, it's time to eat up restaurant stocks.
Tax reform could have a "material impact" on restaurant industry profits in 2018, says Credit Suisse analyst Jason West. By West's calculations, restaurants may see at least 15% earnings upside assuming a corporate tax rate scenario of 25%. The companies that stand to get the biggest profit boost will be ones with most of their operations in the United States. West cautions that some tax savings could be eaten up by competitive pressures and labor cost inflation.
West calls out three restaurant names to own for the year ahead.
Restaurant Brands International
Restaurant Brands International (QSR - Get Report) , the owner of Burger King, Tim Horton's and Popeye's, is a favorite of West's because of its reasonable valuation. He sees several catalysts for the stock: (1) a material capital return event in 2018, such as a special dividend; (2) potential improvement in Tim Horton's locations in Canada; and (3) accelerated growth in newly acquired Popeye's. West sees the stock rising to $74 from $62 currently.
Here is TheStreet's latest interview with Restaurant Brands CEO Daniel Schwartz.
The owner of Taco Bell, Pizza Hut and KFC may see profits surge 25% over 2018 and 2019 primarily driven by global unit growth, expense cuts and stock buybacks. Yum! Brands also scores high marks for being globally diversified. West thinks Yum! Brands has at least 5% upside from its current price of $82.70.
McDonald's has been one of the hottest large-cap stocks of 2017, rising about 44% on the back of improving sales and profits. West believes more gains are in store for 2018.
"Market expectations are high, but the combination of cost savings, capital returns and turnaround potential for the U.S. business could continue to drive the stock higher," West says.
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