Consumers' upbeat mood may boost casual dining fortunes

A customer pulls up to the drive-thru speaker outside a Wendy's restaurant in Peoria, Illinois.
Daniel Acker | Bloomberg | Getty Images

With more upbeat consumers, and signs they are spending this holiday season, it may be time to shift investment from quick-service dining to casual-dining stocks, one analyst says.

"Our bias is to increase exposure to the more discretionary casual dining segment, as opposed to the more staple in nature quick service, given the outlook for consumer stimulus and already improving consumer confidence," Matthew DiFrisco, a Guggenheim analyst, wrote in a research note.

With that in mind, he upgraded Darden and downgraded McDonald's and Wendy's.

DiFrisco noted that the quick-service burger chains will see increased gas prices and rising rates as macro headwinds that could hurt same-store sales and "crimp franchise investment."

About 80 percent of McDonald's and Wendy's restaurants are franchised, and higher interest rates could make it tougher for franchisees to get loans.

The analyst downgraded both burger chains from buy to neutral, and noted that McDonald's and Wendy's were within 10 percent of Guggenheim's price target of $127 and $13, respectively. On Thursday, McDonald's ended the session at $118.47, while Wendy's closed at $12.56.

"[Same-store sales] catalysts more specific to quick service restaurants appear to be decelerating and both brands shares already reflect the successful execution of their strategic restructuring programs," DiFrisco wrote.

The casual-dining sector, however, might fare better, according to Guggenheim. DiFrisco said casual restaurants will likely see improved same-store sales amid a moderate increase in consumer demand.

He upgraded Darden, owner of casual-dining restaurants like Olive Garden and LongHorn Steakhouse, to buy from neutral.

"Post 2016 election results we have entered a phase of heightened consumer confidence, the Trump rally has pushed consumer confidence above 100 with anticipation for tax cuts, economic investment amid statutory mandatory minimum wage increases," DiFrisco wrote. "In a strengthening consumer-driven, macro environment history suggests the greatest upside is in consumer discretionary oriented casual dining whereas consumer-staple related quick service restaurants should experience minimal valuation upside."

In the casual dining space, DiFrisco sees Darden as a standout as it has been outpacing its peers. Plus, there have been positive trends for its out-of-restaurant services like Olive Garden to Go, the restaurant's pickup service, which accounts for 11 percent of the chain's sales.

Some 25 percent of these orders are placed online. According to Guggenheim, online transactions can lead to larger checks and could be a catalyst toward delivery programs.

"Delivery, in our opinion, represents the next phase of off-premise sales; management noted they are in active dialogues with the largest third-party providers," DiFrisco wrote.

Guggenheim issued a target price of $88 for Darden. Shares of the company gained 3.4 percent on the day, closing at $75.59.