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Michael M. Santiago/Getty Images News Morgan Stanley’s data-driven review of the restaurant space to start 2023 included a few high profile rating changes. In assuming coverage of restaurant stocks from John Glass, equity analyst Brian Harbour adjusted ratings across the industry amid what he expects to be a tougher 2023. These shifts included an upgrade of Domino’s Pizza (NYSE:DPZ) and Portillo’s (PTLO) to Overweight from Equal Weight and a downgrade of Chipotle Mexican Grill (NYSE:CMG) to Equal Weight from Overweight. Harbour noted that a slowdown in visits is expected, with consumers increasing focus on value. “Across segments, more consumers are paying attention to price though, making value proposition increasingly important,” he advised clients on Tuesday. “Consumers expect to visit casual dining restaurants on average 4% less in the next six months vs. just a 1% decline for quick-service, aligning with our expectations for customers to turn to more value-oriented options.” Harbour added that fast casual, pizza, and coffee restaurants are showing positive intentions. He attributes this to both strong value perception for brands like Domino’s (DPZ) and Portillo’s (PTLO) as well as a trade down from full service restaurants as consumers tighten belts. In contrast, Chipotle (CMG) was near the bottom of value perception surveys, adding to concerns on foot-traffic trends. “In the near to medium term though, we think it will be harder for the stock to outperform, as we think the concerns about traffic and pricing have merit and will be harder to disprove for several quarters with some further price sensitivity possible, and our top line estimates are below consensus reflecting this,” Harbour advised clients. “Softness spreading to higher end customers and the food delivery channel could be a challenge across fast casual, and might be for CMG as well.” He reduced his price target on the stock to $1,664 from a prior $1,847 alongside the downgrade and removal of top pick status. Yum! Brands (YUM) was instead named a top pick for 2023. A rebound in China and strength at Taco Bell were both noted as key factors undergirding bullishness on the name. It also ranks at the top of the bank’s defensive restaurant picks alongside McDonald’s Corporation (MCD). Yum! Brands (YUM) price target was hiked to $155 from a prior $140. Rounding out the coverage shifts, Sweetgreen (SG) and Krispy Kreme (DNUT) were downgraded to Equal Weight from prior Overweight ratings and Shake Shack was cut to a Sell-equivalent rating. Harbour explained that unit growth, margins, and cash generation metrics add to foot traffic and value proposition trends that loom large in his rating adjustments. Read more on Citi’s recent downgrade of Cheesecake Factory.

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