Should You Look to Add These Restaurant Stocks in April?

Restaurant prices have surged in Canada to start 2018, which could be great news for Cara Operations Ltd. (TSX:CARA) and others.

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In the beginning of 2018, there were many voices sounding alarms over minimum wage hikes in Ontario and elsewhere in Canada and what they would mean for companies going forward. Inflation shot up 2.2% in Canada in February, representing its highest level since 2014. Prices for food and at restaurants were up 4% year over year.

A report in late March from Bank of Montreal Capital Markets concluded that restaurants were dealing with minimum wage hikes by raising item prices. So far, Canadian grocers have not seen the same benefit from the wage movement. With this in mind, is now a good time to leap into restaurant stocks? Let’s take a look at three today.

Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR)

RBI is an Oakville-based quick-serve restaurant company. RBI stock has dropped 7.8% in 2018 as of close on April 9. Shares are now down 5.2% year over year in the midst of controversy for its top Canadian brand.

The ongoing spat between RBI management and Tim Hortons franchisees has severely damaged its reputation among Canadian consumers, according to a survey conducted by Leger and National Public Relations. Tim Hortons dropped from fourth place to 50th in a ranking of 100 companies most admired by Canadians. Most recently, Tim Hortons faced huge public backlash after franchisees rolled back employee benefits in response to Ontario minimum wage hikes.

In 2017, RBI reported system-wide sales growth of 3% at Tim Hortons, which represented the lowest growth in constant currency of its three chains. However, overall, RBI saw revenue rise to $4.57 billion compared to $4.14 billion in 2016. It also offers a dividend of $0.45 per share, representing a 1.8% dividend yield.

Cara Operations Ltd. (TSX:CARA)

Cara is a Vaughan-based company that owns and manages franchises across Canada. Some of its brands include Swiss Chalet, Harvey’s, Kelsey’s, and others. In January, Cara acquired The Keg for $200 million in cash and shares.

Cara stock dropped 4.19% on April 9, but shares are still up 8.4% in 2018 thus far. In 2017, Cara posted net earnings of $109.8 million compared to $67 million in the prior year. The company also hiked its dividend by 5% to $0.1068 per share, representing a 1.4% dividend yield.

In March, Cara CEO Bill Gregson said that Cara has seen strong result in Ontario in spite of concerns over minimum wage hikes. “In Ontario, for our corporate stores, that whole juggling of all those different factors seems to have worked,” Gregson said. “But it’s only two months in.”

MTY Food Group Inc. (TSX:MTY)

MTY is a Quebec-based Canadian franchisor in the quick-serve restaurant business. MTY stock dropped 1.1% on April 9, and shares have plunged 9.9% in 2018 so far. The stock is up 2% year over year.

In 2017, system sales at MTY climbed 55% to $2.3 billion largely due to acquisitions realized in the second half of 2016 and in 2017. EBITDA rose 18% in the fourth quarter to $27.2 million, and net income increased $3.9 million to $19.4 million. MTY hiked its quarterly dividend by 30% to $0.15 per share, which still represents a modest dividend yield of about 1%. MTY is the weakest option of the three, with growth reliant almost solely on acquisitions and a lesser dividend than RBI or Cara.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool owns shares of MTY Food Group and RESTAURANT BRANDS INTERNATIONAL INC. MTY Food Group is a recommendation of Stock Advisor Canada.

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