From supply chain issues to labour shortages, the restaurant industry has faced several different pressures over the past few years; but one analyst said there are signs that this sector is improving, and investors should take advantage of it.

In an interview with BNN Bloomberg on Wednesday, Andrew Charles, senior research analyst and managing director for restaurants at TD Cowen, said investors have been looking for signs of improvement in the restaurant sector, and “broadly speaking, you are seeing healthy sales trends exiting 2022 and into 2023,” which is helping move the multiples on the group.

One of the restaurants Charles has his eye on is Chipotle Mexican Grill, Inc., as he expects the company will outperform as it builds up its loyalty program and improves its margins.

“We see opportunity for a multi-year margin enhancement path here, we think that there's a path to 27 per cent margins in 2024, while the street model is almost 100 basis points lower than that, based on the comments and kind of a margin bridge that we were able to build,” Charles said.

“For me, it's really about the improvements in margins that really can justify earnings growth and upside to consensus EPS (earnings per- hare) estimates, combined with the fact that so long as sales remain strong I think that, you know, we would argue that the margin enhancements here dictate more and multiple expansion just given the fact that's what investors are looking for right now.”

He added that the company is also innovating its menu to add new offerings that follow consumer trends and he sees additional growth opportunities with its loyalty program, which is just entering its fourth year.

Charles recommended Taco Bell’s parent company Yum! Brands, Inc. (YUM) and Wingstop Restaurants, Inc. (WING), in addition to Chipotle (CMG) as his top picks in the restaurant sector.

Charles, his family members and investment clients do not own any shares of the stocks mentioned.