HSBC initiated coverage of four restaurant stocks in a note Wednesday, with the firm believing innovation and digital commerce will likely drive operating model convergence and a broadening of the competitive landscape.
McDonald's (MCD) and Domino's Pizza (NYSE:DPZ) were initiated with Buy ratings, while Starbucks (NASDAQ:SBUX) and Shake Shack (NYSE:SHAK) were started at Hold in the note. The investment bank favors stocks that leverage scale and brand to drive sustainable cash generation.
MCD was assigned a $317 price target, with HSBC stating that its growth is underpinned by its diversified, resilient revenue stream. "After more than eight years and c10bn in investment focused on restaurant renovation, asset modernization, and unit economics, McDonald’s (NYSE:MCD) is ushering in the fastest period of growth in its history," said HSBC.
DPZ's price target was set at $466 per share. Analysts at HSBC believe it has a resilient and diversified franchise model. "Domino’s franchise model supports predictable income streams with solid cash generation, allowing the company to invest in the brand and new growth opportunities," said HSBC. "Pizza has proven to be resilient during economic cycles given its wide appeal and relative affordability, and we view Domino’s expanding carry-out business as defensively positioned for those customers eschewing delivery fees."
HSBC gave SBUX a price target of $107 per share, noting its reinvention with a focus on revenue-enhancing efficiency gains. While the bank sees positives for the company, with recent (FY23) results showing encouraging sales trends, they see near-term headwinds in Starbucks’ second-largest market, China, due to an "uneven and slower-than-expected demand recovery," rising competitive pressures, and the expansion to Tier 2 cities with lower ticket sizes and margins that may weigh on results.
Finally, the SHAK price target was set at $74 per share. HSBC said the company is differentiated, memorable, and transferable. However, it pointed to risks, including execution and limited earnings visibility.