Dutch Bros added to 'best ideas' stock list while Chipotle and Wendy's draw downgrade to neutral at Wedbush

By Steve Gelsi

Cheesecake Factory and Cava boosted to outperform from neutral in ratings flurry

Dutch Bros Inc. was added to Wedbush's best-ideas list of stocks for investment on Thursday as part of a short series of ratings actions in the restaurant sector.

Dutch Bros (BROS) now joins Domino's Pizza Inc. (DPZ) as the only two restaurant businesses on the 25-stock Wedbush best-ideas list, which also includes Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), Microsoft Corp. (MSFT) and First Citizens Bancshares Inc. (FCNCA). The list reflects the firm's top picks for stock market investors

Dutch Bros management "has focused on a number of company-specific transaction drivers: throughput, rewards, marketing, store manager bonus structure, etc. that we believe are in the very early innings," analyst Nick Setyan said.

Dutch Bros' stock was up by 2.2% on Thursday.

Wedbush also upgraded Cheesecake Factory Inc. (CAKE) and Cava Group Inc. (CAVA) to outperform from neutral.

Cheesecake Factory's stock rose 2.8% and Cava's moved up by 4.4%.

Cheesecake Factory's same-store-sales growth estimates appear to be realistic, while the company's margin trajectory and "compelling" cash-on-cash returns are underappreciated, Setyan said.

"We are also hopeful that a declining interest rate environment will alleviate the outsized pressure on its valuation," he said.

For Cava, Wedbush is forecasting another quarter of upside over its "conservative" profit outlook.

"While we view lower grocery inflation as an incremental threat to the fast casual category in 2024, we also believe [Cava's] relative valueproposition and maturation cycle contribution to comp positions it to overcome the incremental headwind," Setyan said.

Wedbush also downgraded Chipotle Mexican Grill Inc. (CMG) and Wendy's Co. (WEN) to neutral from outperform.

Chipotle's and Wendy's stock each fell 0.3%.

Wedbush cited slowing transaction growth at Chipotle for the downgrade.

Meanwhile, Wendy's positioning as a premium quick-serve restaurant is "at risk" due to the increasingly value-oriented environment in the fast-food sector, analysts said.

Wedbush also cited competition from grocery-store meals, which have been coming down in price as inflation moderates.

"We expect restaurants' unfavorable gap versus grocery to continue," Setyan said.

Also read: Dutch Bros says it has no plans to raise prices this year, and stock falls

-Steve Gelsi

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12-21-23 1051ET

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