restaurant stocks look expensive as we take the industry’s pulse with names in our coverage trading at a marketcapweighted 10 premium to our intrinsic valuations while demand has held up nicely to date we’re seeing weak spots with persistent declines in traffic and items per check suggesting priceconscious consumers and a more challenging pricing environment to come nominal samestore sales growth remains healthy up around 57 industrywide over the past three months rms data but traffic down 14 and items per check down 37 remain points of concern we expect slowing sales momentum into the first half of 2024 resulting in a more promotional environment for the industry and a three to fouryear route to normalized restaurantlevel profitability the industry’s bargain bin looks sparse but we see modest upside in wendy’s wen and starbucks sbux shares which trade at 6 and 2 discounts to our 23 and 104 fair value estimates respectively there are certainly positive takeaways from the most recent quarterly data with wage growth slowing to 56 a year in leisure and hospitality and with commodity costs clocking in between deflationary and disinflationary depending on restaurants’ commodity baskets median producer prices are projected to fall nearly 65 in 2023 according to the us department of agriculture therefore we believe restaurant margin performance likely bottomed during fourthquarter 2022 for operators in our coverage with sticky menu price increases and easier annual comparisons for expense growth providing nearterm tailwinds nevertheless as demand softens and the industry’s promotional environment intensifies we expect little incremental improvement over the rest of 2023 underpinning a challenging nearterm operating environment for restaurateurs we continue to view firms with strong pricing power heavily franchised systems and strong digital platforms as best positioned to outperform in the current environment