The fast-casual dining segment is part of the consumer discretionary sector. The segment is no stranger to acquisitions and mergers. Restaurants that have grown to become iconic fixtures, having carved out a special niche and stood the test of time, can be attractive takeover targets. On the other hand, fast-casual restaurants that embrace a healthy trend and continue to expand are also attractive candidates for larger groups or private equity. Here are two fast casual dining stocks that could catch the eye of an acquirer.

Portillo’s Inc.(NASDAQ: PTLO)

For Chicagoans, Portillo’s is an iconic brand synonymous with Chicago street food. Portillo's started as a trailer hot dog stand in 1963 called the Dog House by Dick Portillo. He parlayed it into a famous brand known for its Chicago-style hot dogs and Italian beef sandwich, which is comprised of thinly sliced beef that's slow-roasted for four hours, mixed with sweet and hot peppers served on a French bread bun, and dipped in specially seasoned hot gravy made from a 50-year-old recipe.

Portillo’s will grow to 84 restaurants across 10 states in 2023.   

Steady Eddie growth

Portillo's reported Q3 2023 EPS of 7 cents per share, matching consensus analyst estimates. Revenues rose 10.4% YoY to $166.8 million, falling short of the analyst estimates of $170.73 million. Operating income rose to $15.1 million, up $4.5 million from the year-ago period. Net income grew to $6.5 million, up $3.3 million from a year ago.

Restaurant-level adjusted EBITDA rose to $41.9 million, up $7.8 million. Adjusted EBITDA rose to $27.3 million, up $5.7 million. The total number of restaurants at the end of the quarter totaled 79 locations. Same restaurant sales rose 3.9%. Sales growth was attributed to menu pricing, and a 3.5% decline in transactions offset unit growth. Check out the sector heatmap on MarketBeat.

Restaurant of the Future

The company added seven new restaurants a year ago. The new restaurants are designed to be more efficient. Its Restaurant of the Future is expected to be 5,500 to 6,000 sq. ft, down from 7,000 sq. ft. Parking spaces will be between 85 to 100, down from 120 parking spaces. Peak team members will range from 27 to 32, down from 34.

The 65-foot production line will be shrunk to 47 feet. Restaurants will have 140 to 170 seats, down from 210 seats. New restaurants are expected to have lower build costs, higher productivity, and improved speed of service, resulting in stronger margins and higher free cash flow. 

CEO comments

Portillo's CEO, Michael Osanloo, insists that Portillo's is a growth company. "Keep in mind that we entered this year with 72 restaurants, and we'll end the year with 84 restaurants. So, investors can count on our self-funded development to drive revenue growth in the near term not just in some far flung future.

Our third quarter restaurant-level margin of 25.1% increased 250 basis points year-over-year.”

Osanloo continued, “We're also well on track to deliver year-over-year margin expansion for full-year 2023. We're doing this even as we add more restaurants in a single year than we ever have throughout our 60-year history. Again, this is a testament to our profitable business model." On Nov. 10, 2023,  Stephens upgraded shares of Portillo's to Overweight with a $20 price target.

Portillo's analyst ratings and price targets are at MarketBeat. Portillo’s peer and competitor stocks can be found with the MarketBeat stock screener.

Daily bear flag possible

The candlestick chart on PTLO illustrates a potential bear flag. PTLO fell to a low of $13.89 on Oct. 12, 2023. Shares staged a rally from the lows, triggering the market structure low (MSL) breakout through $15.18. The ascending lower trendline commenced off the lows, marking higher lows. The ascending upper trendline indicates higher highs.

Each breakout attempt through the upper trendline has resulted in a pullback into the flag trading range. The daily relative strength index (RSI) peaked and is retesting the 50-band down. The bear flag triggered a breakdown through the $15.18 MSL trigger. Pullback support levels are at $15.18, $14.48, $13.11 and $12.48.  

Sweetgreen Inc. (NYSE: SG)

Sweetgreen is a fast-casual restaurant chain focused on healthy salads and customizable chicken bowls. The emphasis is on fresh and seasonal ingredients that customers can choose for their salads and bowls, similar to Chipotle Mexican Grill Inc. (NYSE: CMG). The company tries to use locally grown organic ingredients and prioritizes sustainable sourcing and environmentally friendly packaging for a positive impact.

The venture was originally started in 2007 and has grown to over 220 locations, typically located in urban markets in major cities. The company has a loyalty program called Sweetpass to earn rewards, birthday gifts, and access menu exclusives.

Green salads and red ink

Sweetgreen returned to growing revenues but continues to lose money. They reported a Q3 2023 EPS loss of 22 cents, which was 1 cent better than analyst estimates for a loss of 23 cents. Revenues grew 23.6% to $153.4 million, falling short of analyst estimates of $154.62 million. Sale store sales rose 4% while average unit volume (AUV) remained flat at $2.9 million.

The total digital revenue percentage grew to 58%. The company lost $26.5 million from operations, which was an improvement from the loss of $52.9 million in the year-ago period. Net loss was $25.1 million, and net loss margin was negative 16%, an improvement over the net loss of $51 million and net loss margin being negative 41% in the year-ago quarter. The company opened 15 new restaurants.

In line guidance 

Sweetgreen issued in-line guidance for the full year 2023 with revenues of $575 million to $585 million versus $584.84 million consensus analyst estimates. Same-store sales are expected to grow between 3% and 5%. Get AI-powered insights on MarketBeat.

Building healthier communities with real food

Sweetgreen Co-Founder and CEO Johnathan Neman commented, “Our mission is to build healthier communities by connecting people to real food and our long-term commitment to being a positive force on the food system while creating a sustainable and durable brand and business.

For the past 16 years, we have been at the forefront of our industry, pioneering a new category. Our third quarter results demonstrated our continued commitment to building what we refer to as an ant company, one that balances growth and profitability.”

Sweetgreen analyst ratings and price targets are at MarketBeat.

Daily bear flag possible

The daily candlestick chart on SG is nearly identical to PTLO, as they both have the potential to form a bear flag. The flagpole commenced after peaking at $16.58 on July 27, 2023, and falling to a low of $8.64 on Nov. 10, 2023. SG was able to rally upon triggering the daily MSL breakout at $9.76.

The lower ascending trendline indicates higher lows, while the ascending upper trendline indicates higher highs. The daily 200-period moving average is attempting to hold support at $10.97. The bear flag can trigger the breakdown under the 200 period moving average. Pullback support levels are at $9.76, $8.64, $7.81 and $7.28.