A Wall Street Analyst Just Named This Restaurant Stock His Top Pick With 50% Upside. Why It Looks Like a Strong Buy.

Investment firm UBS recently named Dutch Bros (NYSE: BROS) its top pick in the restaurant sector, with analyst Dennis Geiger placing an $85 price target on the stock. That's more than 50% upside based on the stock's price as of June 4.

Geiger highlighted strong and accelerating traffic trends at the coffee shop operator, driven by menu innovation, increasing mobile orders, and the introduction of hot food items. He also noted that new stores are seeing strong growth, helping support mid-teens unit growth. As such, he believes the company could top expectations this year, especially given that Dutch Bros management tends to issue conservative guidance.

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Why it's time to buy the stock

Dutch Bros is one of my favorite growth stocks in the consumer space. The company has been seeing strong same-store sales growth despite the mixed consumer environment. Last quarter, it saw an 8.3% increase in comparable restaurant sales, with a 5.1% increase in traffic. Company-owned locations were even stronger, with a 10.6% jump in same-store sales on a 6.9% increase in traffic.

The company's unique coffee-based beverages and energy drinks are resonating with customers, and it's been investing more in brand awareness. On top of that, it has started introducing hot food items in three-quarters of its stores equipped to serve them. This is a big opportunity, as it has been getting less than 2% of its sales from food, while rival Starbucks (NASDAQ: SBUX) gets around 20% of its sales from food. Thus far, it's seen a 4% lift in same-store sales from shops that have begun offering its hot food items.

More than anything, though, Dutch Bros is a great regional-to-national expansion story. The company started in Oregon and has been gradually expanding eastward. Its shops are small, with most having no indoor seating and two drive-thrus, but they still generate an impressive $2 million in average unit volumes. This allows for quick payback periods and for the company to fully fund its expansion with its operating cash flow. The company ended Q1 with under 1,200 locations and plans to grow to 2,029 stores by 2029. It sees the U.S. being able to support 7,000 total locations.

Despite its same-store sales momentum and long runway for growth, Dutch Bros stock still trades at an attractive valuation. It and Starbucks trade at the same one-year forward price-to-sales (P/S) multiple of 2.8 times, even though Starbucks is the much more mature business. And as Dutch Bros expands, its earnings will continue to ramp up as corporate costs are absorbed across a much larger store base. This makes it a stock to buy not just for this year, but for the long haul.

Geoffrey Seiler has positions in Dutch Bros. The Motley Fool has positions in and recommends Dutch Bros and Starbucks. The Motley Fool has a disclosure policy.