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Fast Food Has Shown ‘Uncanny Improvement’: Analyst

Sian Kennedy | Stone | Getty Images

Restaurant earnings results have been mixed so far this year, but one analyst told CNBC that he is seeing an “uncanny improvement” in fast-food names across the board as many chains revamp their locations and menus and improve execution.

Although fast-food restaurants have performed better domestically than full-service ones, there have been some signs of weakness, said John Glass, a managing director at Morgan Stanley.

“Just last night, Chipotlereported that trends had softened — though still positive — softened since last spring,” Glass told CNBC’s “Squawk on the Street.”

On Thursday, the burrito chain took investors by surprise by missing analysts’ sales estimates due to a slowing U.S. economy and reduced consumer spending. In response, the company’s shares plunged in trading on Friday.

Despite Chipotle’s unexpected miss, Glass said restaurants have had a tremendous run this year.

“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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CNBC Data Pages:

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Disclosures:

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.

Disclaimer

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Follow Katie Little on Twitter @katie_little.

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