Morgan Stanley Recommends Domino's, McDonald's As Restaurant Plays Amid Coronavirus Scare

Coronavirus-related concerns and its impact on the restaurant industry can't be determined right now, but investors looking to flee to safer names should pick Domino's Pizza, Inc. DPZ and McDonald's Corp MCD, according to Morgan Stanley.

The Analyst

John Glass comments on the restaurant sector.

The Thesis

The coronavirus continues to spread across U.S. states which makes it difficult to model the financial impact, Glass wrote in a note. The best available benchmark would be evaluating the level of declines seen in 2008 and 2009 versus 2007. While current uncertainty could result in a more severe near-term impact, it may prove to be shorter in duration.

Using an average 500 basis point full-year- same-store sales deceleration versus prior baseline 2020 estimates, a series of assumptions can be made. Franchised fast-food names who show an average 500 basis point deceleration will see a "relatively modest" 5% to 10% decline in EBITDA.

Chains like Chipotle Mexican Grill, Inc. CMG, Starbucks Corporation SBUX and Shake Shack Inc SHAK who also outperform a 500 basis point deceleration could see an EBITDA decline of 10% to 15%.

But restaurant chains with a higher fixed cost structure that are also more cyclical could see an EBITDA decline of 15% to 30%.

Investors looking for restaurants with the "most protection" in the current environment may want to consider Domino's given its strengths in delivery and McDonald's which was the most defensive play in the last downturn.

Price Action

Shares of Domino's Pizza are down 2.08% at $336.17, while shares of McDonald's were lower by 6.48% at $186.97.

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