“I think traditionally what’s happened is you haven’t seen as much direct trade down,” Glass said. “People use different restaurants for different functions. However, most recently I think you have seen this uncanny improvement across the board in fast food from McDonald’s to Wendy’s, even to some of the regional players, which is suggesting a little bit of trade down that is going on.”
Glass attributed part of this success to “better execution at the restaurant level,” as many fast-food chains revamp their locations and menus. He added that the restaurant industry is also a good barometer of the consumer, as customers tend to spend more when they are feeling positive about their financial situations.
As the Midtown corn belt suffers its worst drought since 1956 and U.S. grain prices jump, investors remain worried about how the increased cost of commodities, particularly of beef, will impact restaurants. At least for now, restaurants should be shielded from the commodity spikes, he said.
Since restaurants are downstream users of food and contract annually or at least every six months for most of their products, they probably will not feel much pressure until next year, Glass said.
For investors looking to update their portfolio, Glass listed Yum Brandsas a company that he likes. The owner of Taco Bell, KFC, and Pizza Hut chains reported lower-than-expected quarterly earnings on Wednesday and said that it expects a return to double-digit profit growthin China in the back half of the year.
—By CNBC.com’s Katie Little
Additional News: Yum’s Profit Disappoints
Additional Views: Yum Brands vs. Chipotle
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Morgan Stanley provided banking and non-investment banking services within the last 12 months for the companies mentioned in this article. The bank also makes a market in these securities.
Follow Katie Little on Twitter @katie_little.