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Why Starbucks, big food chains are favored by Wall Street after sell-off

·2-min read
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Stock markets are being whipsawed with the Federal Reserve expected to begin hiking interest rates, but some analysts see value in big chain restaurants like Starbucks and Dutch Bros.

Even though independent eateries have been ravaged by COVID-19, Bank of America sees a different story for large restaurant and coffee chains.

“We continue to favor Starbucks (SBUX) and Dutch Bros (BROS) as key ideas within our coverage,” Sara Senatore, senior research analyst at Bank of America, wrote in a note to clients this week.

Dutch Bros Inc. jumped by over 3% intraday to above $50 per share, boosted by a broad rally on Wall Street ahead of a Fed policy decision. The stock is up by nearly 30% this week alone.

As the restaurant industry continues to bounce back from the crisis, Wall Street is optimistic about Dutch Bros, given fundamentals that favor expansion and growth. The Oregon-based chain that went public late last year is on the verge of break-even, suggesting “exceptional unit economics and a long growth runway at increasingly attractive valuations,” Senatore added.

Additionally, the drive-thru coffee franchise plans to open 125 new locations this year, up from the 112 new stores it had indicated in a previous forecast. Same-store sales increased 10.1% in the fourth quarter and totaled 8.4% in 2021, according to preliminary Q4 results.

Meanwhile, coffee companies have been gaining momentum even as the Omicron variant spreads. Recently, research from data analytics firm Placer.ai revealed foot traffic at popular chains, with coffee handily outpacing the greater dining sector, and are seen as more resistant to industry challenges.

“We have not seen people return entirely to their pre-pandemic patterns,” Senatore told Yahoo Finance Live last week.

“But we are seeing demand increase on these restaurants' own ordering platforms, whether it's a Domino's app or Starbucks app,” she added.

For Starbucks, BofA says the company’s Rewards app program is a valuable asset that promotes loyalty, encourages more visits, and gives the coffee giant valuable insight into customer behavior.

The Seattle-based coffee chain has leaned into the COVID-19 era, expanding delivery and online services in China through partnerships with Meituan.

The move adds to a series of splashy tie-ups the company has brokered in China recently to go after consumers more aggressively in its second biggest market, even though the country's "Zero COVID" strategy has been a drag on activity.

Starbucks rose by 1% intraday to above $98 per share on Wednesday.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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