Starbucks (SBUX) and Texas Roadhouse (TXRH) are two good bets in the restaurant industry for 2022, according to Quo Vadis President John Zolidis, who has been closely following the restaurant industry. Both companies could beat current earnings estimates in 2022, he says.
Last month, Zolidis predicted slower growth and contracting margins ahead for Starbucks, which has prompted analysts to lower their earnings forecasts for the company. So his new call that Starbucks will beat earnings in 2022 refers to the already lowered analyst estimates.
I’m neutral on Starbucks and Texas Roadhouse. (See Analysts’ Top Stocks on TipRanks)
How to Figure Out Earnings Surprises
Positive earnings surprises are usually followed by significant share price gains, while negative ones are followed by sell-offs. That’s why predicting earnings surprises is at the core of security analysis, which deploys various methods to figure out where earnings will be in the next few quarters.
One of the methods Zolidis applies is Unit Economics, which works nicely in industries where operations can be divided into units, like in the restaurant industry, where operations consist of a collection of restaurants.
One way to determine whether a restaurant chain will beat or miss earnings is to look at the return on invested capital (ROIC) trends per unit, especially the ROIC of new units. A rising ROIC signals a positive earnings trend, making it more likely to beat earnings estimates in the coming quarters. By contrast, a declining ROIC means that the company will miss earnings estimates.
Both Starbucks and Texas Roadhouse belong in the first category. ROICs on new restaurant units have been rising in recent quarters, according to Zolidis’ estimate. Starbucks’ new unit ROIC rose from 14% in December 2020 to 34% in December 2021, while Texas Roadhouse’s new unit ROIC rose from 7% to 18% over the same period.
Wall Street’s Take
Turning to Wall Street, Starbucks has a Moderate Buy consensus rating, based on 14 Buys and eight Holds assigned in the past three months. The average Starbucks price target of $124.24 implies 11.8% upside potential. Analyst price targets range from a low of $105 per share to a high of $142 per share.
Texas Roadhouse is rated a Moderate buy, too, based on six Buys and 10 Holds assigned in the past three months. The average Texas Roadhouse price target of $102.19 implies 23.1% upside potential. Analyst price targets range from a low of $85 per share to a high of $124 per share.
Final Thoughts
Investors don’t seem to share the positive sentiment of Zolidis and the analyst community for the stocks, as both have underperformed the market. Starbucks shares have gained 3.8% YTD, while Texas Roadhouse shares have gained 6.9% YTD, compared to a 21.6% gain of the S&P500.
Apparently, investors have been concerned about the relapse of COVID-19 cases in several states, cooling off investor enthusiasm for “opening trades.” Furthermore, in the case of Starbucks, investors have been concerned about the crack-down of Beijing on high-profile domestic and foreign corporations.
Nonetheless, Starbucks and Texas Roadhouse have good chances to beat earnings estimates in the coming quarters, due to higher ROIC on newly opened stores.
Disclosure: At the time of publication, Panos Mourdoukoutas owned shares of Starbucks.
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