Jacob Sonenshine

Restaurant stocks have gotten crushed because of tariffs. Some could help themselves -- enabling their stocks to recover.

Cava Group stock is down 38% from its high this year, while Sweetgreen shares have lost almost half their value. Papa John's International stock has fallen 36%. Dutch Bros stock is down 28%. Investors are concerned because analysts have recently reduced earnings forecasts. Tariffs in general are hurting expectations for consumer spending, and Wall Street assumes the weaker brands in the competitive restaurant space will see sales and profits suffer badly. Only the most desirable outlets have a chance to enjoy growing spending from customers.

Even larger chains have seen their stocks tumble. Starbucks is down 25% from its peak this year. At the peak, it traded at 35 times analysts' expected earnings for the next 12 months, near the top of its range in the past five years. The price was reflecting high expectations for improved performance, especially with newly installed CEO Brian Niccol, who came over from Chipotle Mexican Grill. That left the stock vulnerable to declines upon any disappointments.

Tariffs partly catalyzed the drop. Higher costs would pressure gross-profit margins, unless management offsets them with higher prices, which is difficult to do without losing customers. If Starbucks lifts prices, it could drive customers away, something the company has seen recently. Last year, weak traffic caused same-store sales to decline 1.5% year over year. Total revenue grew 1.3% to $36.5 billion because the company added new locations. Earnings dropped because most operating expenses rose faster than sales, lowering margins.

Tariffs don't help this picture, so analysts have lowered this year's same-store-sales growth estimate by a few tenths of a percentage point from January. It's now at 0.9%, according to FactSet. Costs like advertising, staff investments, and in-store tools to speed up delivery times, will rise. Analysts haven't reduced expectations for these expenses, pressuring margin estimates. Earnings expectations have dropped 2.5% to $3.06 per share.

The stock has dropped more than that, and now trades at about 26 times earnings -- near the average in the past five years -- because the market is more nervous about the company's long-term growth.

Therein lies the buying opportunity.

"We are strong believers in Brian Niccol and his strategy at Starbucks, but solid evidence of a fixed brand may not be evident until 2026," writes Evercore analyst David Palmer, who rates the shares at Outperform with a $105 price target, about 26% upside from the current $83. He sees the stock trading up to 30 times 2026 earnings by the end of this year, as evidence of faster growth builds throughout this year.

Next year, Palmer expects these initiatives to bear fruit, especially since his debit-card data already show consumers' spending on Starbucks has moved up toward flat year over year in recent weeks, from down 5% around the end of last year.

That's why analysts forecast 4% same-store-sales growth next year, and total revenue growth of 7% to $40.6 billion. Since management will have absorbed those cost increases, higher sales would lift margins, and earnings per share could reach $3.71.

That would lift the stock. If the market is confident that the growth is sustainable, investors will pay a larger multiple on those earnings.

Wendy's stock, down 21% from its peak this year, could also recover. Sales and earnings estimates are down a touch from January, and shares now trade at just over 12 times earnings, down from just over 15 times. The current multiple is lower than that of the average small market capitalization stock, which is already cheaper versus large caps. Growth has slowed in the past few years, in line with the broader industry.

Wendy's is a candidate to see growth reaccelerate. Sales comparisons next year will be easier, so analysts forecast same-store-sales growth of 2.1% for 2026, up from 1% this year, an improvement that's possible if the economy avoids recession. President Donald Trump's willingness this week to negotiate on tariffs with China could stabilize consumer confidence and willingness to spend. Palmer notes that Wendy's new menu items such as the Cajun crunch chicken sandwich and Frosty Swirls could create "buzz," bringing customers into stores.

Plus, management is adding store locations, especially internationally, where it still has only about 1,300 locations and sees the minority of its sales. Total revenue can grow 4% to $2.34 billion next year, which would lift margins and earnings per share by 12%.

That would lift the stock. Palmer uses a multiple of 14 times on estimated 2026 earnings per share to reach his price target of $16 from less than $13 now. That's about 25% upside, although Palmer rates Wendy's stock at In Line.

Snap up these stocks -- they'll satisfy investors soon enough.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 23, 2025 13:26 ET (17:26 GMT)

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