These three restaurant stocks are poised for an earnings boost, Jefferies says

Published Wed, Apr 17 20246:52 AM EDTUpdated Wed, Apr 17 202412:31 PM EDT

After a slow start to the year, several restaurant chains are due to emerge as the winners this earnings season, according to Jefferies. Macroeconomic conditions are improving for restaurants, but the firm expects first-quarter results will come in largely in line with first-quarter expectations. A few factors are to blame. First of all, same-store sales only modestly recovered in March to around flat, while the key metric was down 4.5% in January and 0.6% in February, analyst Andy Barish wrote. He added customer traffic remains challenged as well, although this varies from restaurant brand to restaurant brand, while consumers have simultaneously grown more cautious about their spending. "That said, we believe underlying demand could remain resilient as consumers continue to budget for dining-out occasions, while operators also calibrate/emphasize relative value (we suspect little to no deep discounting at this point)," Barish said. As for the new California minimum wage increase, fast-food establishments are likely going to be able to offset higher labor costs with pricing, but consumer response remains to be seen, he said. Amid this uncertainty, the outcomes for specific restaurant chains could vary idiosyncratically, prompting Barish to highlight three buy-rated restaurant stocks with potential for modest upside, or those where same-store sales could come in above expectations. BJ's Restaurants , down 9% this year, was one of the names he recommended. Investors are expecting the American restaurant chain to report its results the week of April 29. Barish currently has a $41 price target on the name, implying shares could rally 25% from their Monday closing price. Jefferies believes the restaurant chain's earnings per share will come in line, while same-store sales are more likely to have some upside. "Our comp estimate balances what we know was a slow start to 1Q due to winter weather and lots of rain in CA, against known positive tailwinds from remodels & catering momentum, calendar shift, and more favorable Q/Q Placer foot traffic data observed for BJ's through March," Barish wrote. Additionally, BJ's margins could benefit from tailwinds such as efficiency gains from changes to its menu and cost-saving measures. Barish also highlighted Bloomin' Brands , which owns several chains including Outback Steakhouse and Carrabba's Italian Grill. Shares of Bloomin' Brands have slipped 4% in 2024, but Barish's $34 price target means the stock could rally as much as 27% from here. When the company reports the week of April 29, Barish expects earnings per share to come in either in line or slightly higher, while he predicts a modest same-store sales upside. "Pricing & potential for improving relative traffic momentum should be fairly well-balanced against inflationary commodity/labor cost trends, and is reflective of specific 1Q headwinds related to the calendar shift ($0.06 hit to EPS), significant winter weather in early 1Q ($0.05 hit) and Brazil tax exemption change ($0.08 hit)," the analyst wrote. He added that further upside in 2024 will come from productivity initiatives that could save another $50 million for the company. Lastly, McDonald's is due to report its quarterly earnings on April 30. Barish sees first-quarter U.S. same-store sales and earnings per share estimates coming in line with analysts' expectations, while EBITDA could surprise to the upside. Shares of McDonald have shed more than 10% this year. Barish's price target of $330 corresponds to a potential rally of 24% for the fast-food stock. Idiosyncratic factors at McDonald's could drive "market share gains in a muted traffic environment," including "core menu and expanding chicken platform (Krispy Kreme expansion over next couple years also a plus), off-premise convenience, rewards/digital, value, and a robust marketing engine," Barish wrote. — CNBC's Michael Bloom contributed to this report.