The latest Earnings Outlook shows optimism over this earnings season, with the bottom line of the S&P 500 index expected to grow 17.8% and revenues projected to rise 7.6%.

Also, first-quarter earnings for the 52 S&P 500 companies, which have already released results, have posted earnings and revenues growth of 27.9% and 10.7% respectively, from the prior-year quarter. Moreover, 84.6% of the companies surpassed EPS estimates while 78.8% topped revenues.

Here’s How Restaurants Can Build Your Appetite

After surviving the seven-quarter spell of declining comps, the U.S. restaurant industry was pleasantly surprised in the fourth quarter of 2017. According to TDn2K’s The Restaurant Industry Snapshot, fourth-quarter comps were up 0.4%, comparing favorably with the third-quarter’s comps decline of 1%. March shone bright on the industry as it recorded the highest sales growth since October 2017, with comps growing 0.8%. Comps in the first quarter, however, ticked up only 0.1% year over year. Nonetheless, the industry has posted two successive quarters of positive comps which reflects slow yet steady growth.

Moreover, the restaurant industry saw sales growth in the last four of the past six months. This indicates that the soft performance during the first two months was primarily due to external factors like bad weather.

The turnaround for most restaurants, starting November 2017, was backed by a rise in consumer demand and discretionary spending. This is evident from the fact that guest check growth has been accelerating in recent quarters. Average of guest check growth in the first two quarters of 2017 was 2.1% while that of the last two quarters was 2.3%. Moreover, in the first quarter of 2018, average guest check rose year over year to 2.8%.

Moreover, most of the restaurants are adopting aggressive sales-building strategies to drive demand. The fourth quarter bore the fruits of these efforts. We believe that the first quarter might also have witnessed an overall improvement in restaurant sales given the operational efficiencies of restaurant bigwigs.

However, the Zacks Retail – Restaurants industry has gained 9.9% in the past year, underperforming the S&P 500’s gain of 15.2%.

Q1 Earnings Expectations Are Encouraging

Notably, majority of the Zacks broad sectors (14 out of 16) are expected to be in the positive territory in the first quarter of 2018. Restaurants in the wider Retail wholesale sector seem to have a solid footing as well. The latest earnings outlook predicts a 12% rise in the sector’s earnings compared with 3% growth in the last reported quarter. Revenues in the first quarter are expected to rise 7.6% (a little lower than 9.7% in the fourth quarter of 2017). Margins in the quarter are anticipated to increase 0.2%, comparing favorably with the prior quarter’s decline of 0.3%.

How to Pick the Right Stocks?

Amid a wide range of restaurant stocks, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.

While it is impossible to be sure of the outperformers, our proprietary methodology — positive Earnings ESP along with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Key Picks

Here are three restaurant companies that might interest investors.

Our first pick would be Domino's Pizza, Inc. (DPZ Quick QuoteDPZ - Free Report) . This pizza giant is expected to become the leading pizza company in 2018. The U.S. quick-service pizza space is growing by leaps and bounds and investors might want to consider this stock.
Domino’s holds a Zacks Rank #3 and has an Earnings ESP of +0.12%. The consensus estimate for first-quarter earnings is pegged at $1.76, suggesting 39.7% year-over-year growth. Moreover, Domino’s posted a positive earnings surprise in each of the last four quarters, the average being 5.23%. The company is scheduled to report results on Apr 26, before the market opens. You can see the complete list of today’s Zacks #1 Rank stocks here.

We also count on Brinker International, Inc. (EAT Quick QuoteEAT - Free Report) , another renowned restaurant operator, developing and franchising restaurants under the Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands.

The company topped earnings estimates in three of the trailing four quarters, the average beat being 8.65%. A Zacks Rank #3 and an Earnings ESP of +1.66% suggest an earnings beat for the company in the to-be-reported quarter. The consensus estimate calls for earnings of $1.03 in the quarter, reflecting a year-over-year increase of 9.6%. Brinker is expected to release third-quarter fiscal 2018 results on Apr 24.

Headquartered in Dallas, TX, Wingstop Inc. (WING Quick QuoteWING - Free Report) is our final pick. The company primarily offers cooked to order, hand-sauced and tossed chicken wings.

Wingstop carries a Zacks Rank #3 and an Earnings ESP of +6.33%. The consensus estimate for earnings for the to-be-reported quarter is 20 cents. The company delivered an earnings surprise in each of the trailing four quarters, the average beat being 21.56%. Wingstop is scheduled to release first-quarter results on May 3, after market close.

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