BMO Capital Markets

Even if there are some promising signals that potential inflation may moderate a bit and some robust restaurant spending trends, BMO Capital Markets said it is still taking a cautious approach to the restaurant industry.

BMO Capital’s team led by analyst Andrew Strelzik expressed continued concern over the possibility of a future decrease in restaurant spending.

Despite the relief of a $1/gal reduction in petrol prices, the Fed’s efforts to control inflation, the deterioration of consumer health indicators, and indications of restricting spending elsewhere in the economy should be noted.

The company’s top suggestions for the industry to benefit from a potential consumer trade-down effect with restaurants are Papa John’s International (NASDAQ:PZZA), Wingstop (WING), and McDonald’s (NYSE:MCD). The favorite high-end ideas include Dave & Buster’s Entertainment (PLAY), Bloomin’ Brands (NASDAQ:BLMN), and Brinker International (NYSE:EAT) since a recession is thought to be largely priced into shares to offer an alluring risk-reward profile compared to rivals.

Following an Outperform recommendation for Wendy’s Company (NASDAQ:WEN), BMO downgraded the restaurant company last week to Market Perform. The business was also getting more and more worried about a trade-down impact inside Wendy’s (WEN) menu as price-sensitive customers cling to value items and order add-ons that are less expensive.

In early August, through a note to clients then, a BMO Capital analyst maintained the firm’s Outperform rating and raised the firm’s price objective on McDonald’s (NYSE:MCD) to $300 per share.

As the “pandemic pushed improvements in MCD’s competitive positioning in these important IOM markets,” the analyst informed investors, they believe McDonald’s is just beginning to realize rapid growth and share gains in Europe.

According to the analyst, the fast food behemoth is doing well in Europe, and there is still plenty of room for accelerated performance after looking at more data.

“Restaurant business is still significantly below pre-pandemic levels, creating more potential. The total number of restaurant transactions in the top 10 markets in Europe for MCD in the IOM category remained 20% or less below pre-COVID levels in 2021. 2022 most certainly represented a further rebound, but it was still far below 2019 comparable to the United States “Finally, the expert said.

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