Jul 30, 2019

Fast food's digital revolution is bringing all-time high stock prices

Dion Rabouin, author of Markets

Illustration: Sarah Grillo/Axios

Investors are scrambling to get their hands on next-generation meatless and agrifood technology companies, but the past couple of years have proven very lucrative for old-fashioned fast-food chains.

Why it matters: While legacy brands like Kraft Heinz and Campbell's are losing market share as consumers' tastes and shopping habits change, fast-food legacy names like McDonald's and KFC/Taco Bell owner YUM! Brands are seeing all-time high stock prices.

  • It's thanks in large part to investments in digital engagement and third-party delivery that have turbocharged sales and revenue in recent quarters.

By the numbers: Restaurant stocks have outperformed the S&P 500 by 13% over the last 12 months and valuations are up 16% year over year, analysts at Goldman Sachs said in a Monday note to clients.

  • Quick service and fast-casual restaurants — including traditional fast-food and pricier chains like Chipotle and Shake Shack — are doing even better, outperforming the S&P by 14% year-to-date and 27% over the last 12 months, Goldman analysts led by Katherine Fogertey said in the note.
  • McDonald's has seen its stock hit all-time highs 18 times in 2019, according to ETFTrends.com.
  • Even last year, when the S&P fell 6.2% overall, 5 companies from the fast-casual restaurant sector posted annual gains of 30% or more, led by Wingstop, which rose 65%.

The big picture: Even better for investors, "fundamentals are accelerating," Goldman analysts say, calling for 28% upside for Chipotle's stock — it touched a record high just last week — to $1,000 a share.

  • "Restaurants is a rare sector in the market that doesn’t yet face Amazon encroachment — digital is helping to drive growth and profits."

Between the lines: The fast-food industry's biggest tailwind is coming from a surprising source — the increased pay of low-wage workers.

  • After trailing higher-paid workers for years since the financial crisis, earnings for the bottom 25% of workers have been growing at a rate much faster than the national average, and weekly earnings for the bottom 10% of full-time workers have grown even faster, data shows.
  • Generally, rising wages would be seen as a negative for the industry, but coupled with stable gas prices, the increasing paychecks of low-wage workers means more money spent at fast-food and fast-casual restaurants.

Be smart: Goldman's research team estimates 70% of the industry's sales growth over the past 5 years can be explained by rising wages, lower gas prices and a boost from third-party apps like GrubHub and Uber Eats.

Go deeper: More than one-third of Americans report eating fast food every day

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