1 Restaurant Stock with Exciting Potential and 2 to Approach with Caution

Yahoo

15-07-2025

Restaurants increase convenience and give many people a place to unwind. But the side dish is that they're quite difficult to operate because high inventory and labor costs generally lead to thin margins at the store level. This leaves little room for error if demand dries up, and it seems like the market has some reservations as the industry's returns were flat over the past six months while the S&P 500 was up 5.4%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one restaurant stock boasting a durable advantage and two best left ignored.
Market Cap: $2.09 billion
Founded by Dave Thomas in 1969, Wendy's (NASDAQ:WEN) is a renowned fast-food chain known for its fresh, never-frozen beef burgers, flavorful menu options, and commitment to quality.
Why Are We Wary of WEN?
Poor same-store sales performance over the past two years indicates it's having trouble bringing new diners into its restaurants
Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Wendy's is trading at $10.95 per share, or 10.7x forward P/E. Dive into our free research report to see why there are better opportunities than WEN.
Market Cap: $3.18 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ:CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Why Is CAKE Not Exciting?
Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new restaurants
Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $64.30 per share, The Cheesecake Factory trades at 16.7x forward P/E. If you're considering CAKE for your portfolio, see our FREE research report to learn more.
Market Cap: $12.5 billion
With locations often featuring Western-inspired decor, Texas Roadhouse (NASDAQ:TXRH) is an American restaurant chain specializing in Southern-style cuisine and steaks.
Why Will TXRH Outperform?
Offensive push to build new restaurants and attack its untapped market opportunities is backed by its same-store sales growth
Same-store sales growth over the past two years shows it's successfully drawing diners into its restaurants
ROIC punches in at 18.7%, illustrating management's expertise in identifying profitable investments, and its returns are growing as it capitalizes on even better market opportunities
Texas Roadhouse's stock price of $194 implies a valuation ratio of 26.6x forward P/E. Is now the right time to buy? Find out in our full research report, it's free.
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