These battered stocks could reap monster returns thanks to strong consumer spending

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OWhile much of the market is troubled by the idea of ​​weakening consumer spending – and results like walmartit is (NYSE: WMT) panicked investors – American Express(NYSE:AXP) the recent earnings call paints a more encouraging picture.

The giant payment card company reported spending by its members at record highs, “led by a strong rebound in travel and entertainment”. CEO Steve Squeri reports that while consumers are spending less on goods, they are increasingly spending on experiences. So even though they don’t buy as many clothes at Walmart, they spend on travel and entertainment.

Squeri also says this category surpassed pre-pandemic levels for the first time in April. This doesn’t necessarily mean the average consumer is splurging on plane tickets to the Caribbean or a luxury hotel when they get there, but it does mean they’re indulging in more affordable experiences closer to home. , like dining out or enjoying a day out. travel. American Express is in a unique position to identify these trends, as it has information on the transactions and spending habits of more than 100 million consumers on a monthly basis.

With that in mind, let’s look at three stocks that seem well positioned based on American Express’ consumer image.

Image source: Getty Images.

1. Ruth’s Home Group

Ruth’s Home Group (NASDAQ: RUTH), owner of Ruth’s Chris Steakhouse, can certainly provide experiences consumers can afford on special occasions. People may not buy as many Weber grills, but they go to places like Ruth’s Chris with their friends and family to celebrate birthdays and other milestones.

On its latest earnings call, Ruth’s Hospitality management team said sales have now surpassed pre-pandemic levels and the company is seeing an increase in business “just because or for a special occasion. “, reinforcing American Express’ view of the consumer. With an average check size of $83, Ruth’s Chris isn’t a cheap night out, but it’s not out of reach for the average consumer looking to celebrate a special occasion.

During the first quarter, Ruth’s Hospitality delivered comparable restaurant sales growth of 41% over 2021 and 8% over 2019. In addition to being in pole position for a resurgence in travel spending and entertainment, Ruth’s Hospitality Group is also modestly valued at just 10 times future earnings. And it sports a juicy 3.3% current dividend yield.

2. Texas Truck Stop

Like Ruth’s Hospitality, other steakhouses Texas Truck Stop (NASDAQ: TXRH) is in the catbird seat for a resurgence in travel and entertainment spending. Texas Roadhouse is also more affordable than Ruth’s Chris, with an average check size per guest of $19.68, making it an option for an even wider range of consumers to enjoy a night out.

It appears that more and more customers are frequenting Texas Roadhouse locations, with the company seeing comparable restaurant sales growth of 16% for company-owned restaurants and 20% for national franchise restaurants over the past year. first trimester. Additionally, for the first five weeks of the second quarter, the company says it saw a 9% increase in comparable sales year over year. In total, revenues increased by 23% compared to the previous year.

In addition to its namesake Texas Roadhouse locations, Texas Roadhouse also boasts Bubba’s 33, which describes itself as “family dining meets garage bar”, a concept that should also work well in an environment where entertainment spending is increasing. With 632 Texas Roadhouse units and 36 Bubba units in the United States and globally, Texas Roadhouse has plenty of room to continue growing its footprint.

Texas Roadhouse shares are more expensive than Ruth’s Hospitality Group, but they don’t seem unreasonable at 17.6 times future earnings. Additionally, Texas Roadhouse is paying a dividend which is now yielding a healthy 2.2%. Texas Roadhouse also implemented a massive $300 million stock buyback program and repurchased nearly $30 million of stock in the first five weeks of the second quarter.

3. Callaway Golf

Going out and spending on travel and entertainment doesn’t have to be limited to restaurants. Callaway Golf (NYSE: ELY) is another stock that could be positioned attractively as consumers spend more on experiences, not only because it sells golf clubs, but also because it is the parent company of Topgolf.

Topgolf can perhaps best be described as a gamified driving range that also serves food and drink, and in recent years has become a popular destination for a day or night out. Topgolf went from 40 sites in 2017 to 70 at the end of 2021.

But Callaway’s ambitions don’t stop there: it wants to double the number of Topgolf players from 28.5 million in 2021 to 57 million by 2025. The company estimates the number of Topgolf locations to be just 20 % of what it could be. when the market is fully penetrated.

Callaway has grown revenue at a compound annual growth rate (CAGR) of 17% over the past six years, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have increased 32% over the same period. The company’s goal is to grow that adjusted EBITDA from $448 million last year to $800 million or more in 2025.

Callaway isn’t as cheap as Texas Roadhouse or Ruth’s Hospitality, and currently pays no dividends. But the potential for growth here is immense as Topgolf grows in popularity and consumers continue to spend on new experiences.

Much has been made of the fact that consumers are spending less on goods. But the findings from American Express, coupled with details on these three stocks, show that consumers are increasingly spending on travel and entertainment. Whether they’re hitting the driving range or grabbing a tomahawk steak, they’re creating a tailwind that should propel all three actions.

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American Express is an advertising partner of The Ascent, a Motley Fool Company. Michael Byrne holds positions at Walmart Inc. The Motley Fool holds positions and recommends Texas Roadhouse and Walmart Inc. The Motley Fool recommends Callaway Golf. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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