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Top stock pics for 2015 dominated by QSR, pizza, fast casual

Quick-service, fast casual and pizza brands dominated top picks in the 2015 Best Restaurant Stock Pick Competition hosted by ICR.

January 9, 2015

Quick-service, fast casual and pizza brands dominated top picks in the 2015 Best Restaurant Stock Pick Competition hosted by ICR.

The 2015 selections were made by leading sell-side equity research analysts ahead of the 17th Annual ICR XChange, which will be held January 12-14, 2015 at the JW Marriott Orlando Grande Lakes in Orlando, Florida.

Picks and predictions for 2015:

Dunkin' Brands Group, Inc. (NASDAQ: DNKN) — Sharon Zackfia, William Blair & Company: "Given the recent stock pullback on a lowered 2015 outlook, we see the potential for Dunkin's shares to rebound nicely in 2015. We believe new guidance will prove achievable if not beatable with Dunkin' U.S. comps likely to improve in 2015 as the company laps easier comparisons related to both weather and a heavily promotional QSR breakfast environment. Moreover, we believe management has prudently handicapped expectations for international profitability next year and view the longer-term prospects for Dunkin' as solid given still-positive traffic trends, franchisee profitability at all-time highs and a robust development pipeline."

Krispy Kreme Doughnuts, Inc. (NYSE: KKD) — Nick Setyan, Wedbush Securities: "We believe that a near-term inflection in KKD's SSS growth trajectory, combined with acceleration in both company and franchised unit development to a mid-teens growth rate could result in upside to FQ4:15 and FY16 expectations, as well as an upward revaluation of shares. Mature sales run rates at the new smaller prototypes continue to trend at ~$30K/week, a level we believe results in cash-on-cash returns of >70 percent and justifies continued acceleration in company-owned development. With >40 percent cash-on-cash returns for franchisees, we believe FY15 domestic franchise unit growth guidance of 20-25 units is realistic, and that franchisee development is poised for annual mid-teens unit growth going forward. In addition, 43M remains on existing repurchase authorizations, and we expect ~$17 million to be deployed in FQ4. We reiterate OUTPERFORM and our $24 price target."

Noodles & Company (NASDAQ: NDLS) — David Tarantino, Robert Baird & Co.: "Our top pick is NDLS. We believe Noodles is a highly differentiated and compelling concept that is well positioned to capture share within the rapidly growing fast-casual segment of the industry. After a relatively sluggish year in 2014, we see potential for same-store sales and earnings momentum to bounce back in 2015. Additionally, given that the company remains in the early stages of expansion, we think NDLS can sustain above-average growth well beyond 2015. We believe a premium valuation for NDLS is supported by the company's sizable unit growth opportunity, good incremental returns on capital and prospects for solid near-term operating results."

Papa John's International Inc. (NASDAQ: PZZA) — Peter Saleh, Telsey Advisory Group: "We believe 2015 will be characterized by operating margin expansion driven by moderating cheese costs and continued market share gains, both domestically and internationally. We continue to believe that double digit unit growth internationally, coupled with mid-single digit same-store sales increases will lead to earnings outperformance. Domestically, we believe the implementation of the new POS system, growth in digital orders (now at 50 percent of sales), and a decline in fuel prices could help drive margin expansion in the new year. Furthermore, we expect free cash flow to increase in 2015 as CAPEX declines, leading to more significant share buybacks and continued dividend increases."

Papa Murphy's Holdings, Inc (NASDAQ: FRSH) — Andy Barish, Jefferies: "Papa Murphy's Holding, Inc. will continue to drive growth in the pizza category through new unit openings, same-store sales and share gains. The continued implementation of marketing, POS, online ordering and improved operations should lead to strong results and drive the stock higher. The valuation remains attractive as it trades at a discount to its highly franchised peers."

Panera Bread Company (NASDAQ: PNRA) — Jeffrey Bernstein, Barclays: "We expect Panera 2.0 will support a re-acceleration in EPS growth medium-term. With short-term expectations low, we see a favorable risk-reward, especially as traffic has already begun to turn ahead of the Panera 2.0 rollout. While many are cautious on a 12+ month turnaround, we expect the shares will outperform, driven by EPS upside and related multiple expansion. Our price target is $183."

Jeff Farmer, Wells Fargo Securities: "Our top pick for 2015 is Panera Bread Company. Although we expect 2015 EBITDA growth to be modest (flattish), we believe Panera's valuation will inflect with improving topline trends. Our confidence in Panera's ability to accelerate both transaction and SSS growth in 2015 is driven by the combination of: (1) staffing and increased throughput efforts that began to roll out in late 2013 but are just now beginning to pick up momentum (30 second improvement off of almost 4 minute production time entering Q3 2014); (2) the introduction of new creative/advertising in early 2015 following frustrating early marketing efforts in 2014; (3) rapid pick-up taken nationwide with the full benefit of marketing support by spring 2015; and (4) a tiered menu pricing strategy that will look to reduce price sensitivity on a market-to-market basis."

Restaurant Brands International (NYSE: QSR)— Nicole Miller Regan, Piper Jaffray: "We recognize QSR (formerly BKW) shares as a top pick as we enter the new year. Following the company's recent merger with Tim Hortons (THI), we believe the newly combined entity is positioned to evolve into a portfolio of global growth brands over time. Further, we believe the company will exhibit a strong cash flow generation profile that will support both continued reinvestment into the business and an eventual return to capital allocation via share repurchase and dividends over time. Primary catalysts include continued business momentum, accelerated development, and capital deployment. We reiterate our OW rating and are increasing our PT to $44 (vs. $34 prior) based on 20x our FY15 EV/EBITDA (vs. 16x prior). We believe the increased multiple is warranted given the growth in scale and EBITDA following the recent merger."