The Ratings Game

April 2, 2020, 11:43 a.m. EDT

Domino’s Pizza, Papa John’s to benefit from coronavirus-related restaurant closures, analysts say

The National Restaurant Association says 3% of restaurants have already permanently closed

By Tonya Garcia, MarketWatch


Bloomberg
Domino’s Pizza could gain market share as smaller pizza operators shutter for good due to the coronavirus pandemic

Domino’s Pizza Inc. and Papa John’s International Inc. will benefit most from the flood of restaurant closures that will likely result from the coronavirus pandemic, BTIG said.

Many restaurants across the U.S. are currently closed except for takeout and delivery due to social distancing guidelines.

Small businesses, including restaurants, are vulnerable to these widespread dining room closures, with many owners lacking the funds to wait out the pandemic.

According to a report from the National Restaurant Association, 3% of restaurants have already closed permanently. Another 11% anticipate closure in 30 days.

President Donald Trump has extended social distancing guidelines through April 30.

Watch: How to pick restaurant stocks that could survive the looming crisis

“We expect independent restaurants to cede market share to chains as a result of coronavirus,” wrote BTIG analysts led by Peter Saleh. “We believe this dynamic could be most pronounced in the pizza space, accelerating an existing trend, given its fragmented nature where independents account for roughly half of sales.”

Independent owners represent 52% of sales in the pizza category.

“This fragmented market is in stark contrast to quick service categories including hamburger, Mexican, sandwich and chicken in which major chains account for the vast majority of the category, leaving them little to gain from smaller operators, and there is often a dominant concept with a 30%-to-40% share,” BTIG said.

Many independent pizza restaurants have delivery capabilities, but rely on dine-in for a chunk of their business. Independent operators represent 35% to 45% of overall restaurant sales, according to data cited by BTIG.

“Additionally, we expect consumers to shift their purchasing habits toward value offerings and bundles as the economy heads into a likely recession,” BTIG said.

BTIG rates both Domino’s (NYS:DPZ)   and Papa John’s (NAS:PZZA)   stock buy with a $405 price target on the former and $75 price target on the latter.

Read: Coronavirus pandemic driving sales of small appliances for cooking, health and wellness

Domino’s stock has rallied 34.2% over the past year. Papa John’s shares have gained 4.2%. The S&P 500 Index (S&P:SPX)   has tumbled 12.6% for the period.

Raymond James’ healthcare policy analyst Chris Meekins thinks there’s an 80% chance that “we begin to turn a corner” after July 4. With that in mind, fellow analysts led by Brian Vaccaro upgraded Olive Garden parent Darden Restaurants Inc. (NYS:DRI)   to strong buy and Chuy Holdings Inc. (NAS:CHUY)  to outperform. Analysts think liquidity concerns are “overdone.”

Analysts have a $65 price target for Darden and $14 for Chuy.

SunTrust Robinson Humphrey analysts reiterated their buy stock ratings for Chipotle Mexican Grill Inc. (NYS:CMG)   , McDonald’s Corp. (NYS:MCD)   and Wingstop Inc. (NAS:WING)  

SunTrust upgraded Denny’s Inc. (NAS:DENN)   and El Pollo Loco Holdings Inc. (NAS:LOCO)   to buy based on liquidity and their off-premise business. SunTrust has an $11 price target on both stocks.

“We have little insight into the overall financial leverage of franchisees, but note that consolidation over the past five years may have resulted in significant debt,” SunTrust wrote. “However, we expect franchisors and lenders to be flexible with royalty and rent deferrals (Wendy’s, McDonald’s and Restaurant Brands International have already indicated that they will be), and interest payment delays and/or debt restructuring (government agencies are encouraging banks to be flexible).”

Restaurant Brands International Inc. (NYS:QSR)   is the parent company to Burger King and Popeyes Louisiana Kitchen.

Restaurant Brands is also buy rated at SunTrust.

KeyBanc Capital Markets thinks McDonald’s franchisees could receive as much as $2.5 billion in loans, thanks to the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Also: This part of the $2 trillion coronavirus stimulus package will save you money in your 401(K) and IRA

“[W]e believe highly franchised restaurant businesses will be the biggest beneficiaries of the act and that most operators of these chains are likely to receive generous relief packages from the government,” KeyBanc wrote. “However, large company-owned restaurant systems are unlikely to receive significant support under the new legislation.”

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