Financial, political risk hit restaurants, but good news for fast-food delivery

The increasing belief that the US is about to go into recession has led Stifel Nicholaus analyst, Paul Westra to downgrade 11 restaurants, stating that falling restaurant sales are the "canary that lays the recessionary egg," since historically, restaurants have led the stock market lower ahead of previous financial crises. Westra also believes recovery for the restaurant industry will be much more muted than previously. On another note, what has appeared bad for sit-down restaurants has been good for restaurant delivery companies, as political turmoil and economic concerns have resulted in more Americans ordering in; for instance, KeyBanc analyst Chris O'Cull has raised his rating on shares of pizza delivery firm, Papa John's.

Maybe you’ve been looking for some respite from the political hellscape that is the US 2016 election year. And maybe you’ve been finding solace inside a pizza delivery box.

As tensions have flared from civil and political disruptions across the US this year, one theory about the resulting public reaction is that the restaurant industry has experienced a slight slowdown in business. According to restaurant analyst Chris O’Cull at KeyBanc, foot traffic at US casual-dining restaurants has been off by as much as 5% in recent weeks.

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But what’s bad for the sit-down restaurant industry has been good for restaurants that deliver—so much so that O’Cull raised his rating on shares of Papa John’s, a pizza delivery chain that is based in Louisville, Kentucky, and delivers all across the US.



“[W]e believe the civil and political disruptions that have negatively impacted restaurant dining may be helping pizza operators that deliver to consumers,” O’Cull wrote in a July 19 research note, in which he upgraded his rating on Papa John’s shares from “sector weight” to “overweight.”

“We do not believe the consumer has “entrenched,” but has likely shifted more in favor of convenience,” he noted

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In other words, people are anxious enough about the political turmoil in the US right now that they’d rather stay at home and chow down on delivery pizza than make a trip to a sit-down restaurant.

“We expect this phenomenon will play out at least through the general election in November,” noted O’Cull, who has a 12-month share price target of $80 for Papa John’s. The stock closed July 22 at $73.25.