Market Analysis

Fast Food Chains Outperform Amid Tariff-Induced Market Decline

Amos Simanungkalit · 04 Apr44.6K Views

Image Credit: Yahoo!Finance

Amid the market turmoil sparked by President Trump's reciprocal tariffs, investors are finding refuge in fast food chains.

Shares of McDonald's (MCD), Yum! Brands (YUM), and Restaurant Brands International (QSR) saw gains on Thursday, even as the broader market plummeted. McDonald's rose 2%, Yum! Brands gained 2%, and RBI climbed 1.4%, while the S&P 500 dropped nearly 5%.

According to BTIG analyst Peter Saleh, fast food chains could be seen as a safe haven as investors try to protect their portfolios from tariff-related risks and uncertainty. Most of the products for these chains are sourced domestically, with only small amounts of items like produce, beef, and wheat imported from countries such as Canada and Mexico.

Starting April 5, all imports will face a baseline 10% tariff, and by April 9, 60 countries will see higher rates. Notably, China faces a 34% tariff on top of its existing 20% tariff, totaling 54%. However, products compliant with the US-Canada-Mexico agreement (USMCA) are exempt from tariffs, benefiting the food industry, as about 80% of food imports from Canada and Mexico meet these criteria.

The franchise model also gives fast food giants an advantage over fast-casual chains like Chipotle (CMG), Cava (CAVA), Sweetgreen (SG), and Shake Shack (SHAK), whose shares dropped 4%, 7%, 13%, and 12%, respectively. Saleh noted that earnings for franchise businesses are less impacted during a downturn compared to fast-casual chains.

Despite these advantages, analysts, including Saleh and Bernstein's Danilo Gargiulo, maintain Neutral ratings on McDonald's and Yum! Brands, citing concerns over their lack of earnings growth. Saleh pointed out that McDonald's, trading at 25 times its earnings growth, may not offer good value, and the chains' focus on value options like $5 meal deals could hurt their profit margins.

Phil Kafarakis, CEO of the Food Away From Home Association, warned that the tariffs could lead to further pricing reviews, squeezing margins as fast food chains continue to push promotions. Kafarakis predicted that the frequency of these promotions would increase as restaurants try to mitigate the impact of rising costs.

Economist Gregory Daco raised recession odds from 40% to 60%, predicting that the new tariffs could significantly hurt the U.S. and global economy, potentially leading to a slowdown in consumer spending.

Despite this, fast-casual restaurants may still be insulated from the tariff impact, as most of their sourcing is from Canada and Mexico. William Blair analyst Sharon Zackfia believes fast-casual chains will outperform as the price gap between them and fast food chains narrows, benefiting from both trade-down from casual dining and trade-up from fast food.