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If you plan to invest your money into the large cap restaurant chains, your choice is limited to two names: YUM! Brands (NYSE:YUM) and McDonald's (NYSE:MCD). It seems that the choice between those two companies is typical investment dilemma: higher growth and higher valuation (YUM! Brands) versus lower growth and lower valuation (McDonald's). Which company will be better pick?

Financial results:

Financial results of McDonald's in 2012 are a little bit disappointing. McDonald's for nine months of 2012 reported total revenues of $20614.9 million, representing a 2% increase from the corresponding period in 2011. Net income attributable to McDonald's was $4068.7 million, representing a 1% decrease from the corresponding period in 2011.

The table shows the results of McDonald's for nine months of 2012 and 2011

Nine Months Ended September 30

2012

2011

% Change

Revenues

20614,9

20183,3

2%

Operating Income

6406,8

6409,7

0%

Net Income

4068,7

4126,5

-1%

Earnings per share-diluted

3,98

3,94

1%

Source: McDonald's financial statements.

Investors may be a little bit confused especially by the information that McDonald's global comparable sales decrease 1.8% in October.

Financial results of YUM! Brands in 2012 are very good, especially if we take into account operating or net income. YUM! Brands reported for nine months of 2012 net income of $1260 million, representing a 31% increase from the corresponding period in 2011.

The table shows the results of YUM! Brand for nine months of 2012 and 2011

Nine Months Ended September 30

2012

2011

% Change

Revenues

9480

8515

11%

Operating Income

1789

1308

37%

Net Income

1260

963

31%

Earnings per share-diluted

2,65

1,99

33%

Source: YUM! Brand's financial statements.

Valuation:

As one could expect P/E ratio of YUM! Brands is higher than P/E ratio of McDonald's. Current valuation of McDonald's seems to be attractive because it's lower than industry average and the company has excellent track record of earnings growth in the past and above average profitability. It also pays a high dividend - the company has lately announced quarterly cash dividend increases of 10% to $0.77 per share, which is the equivalent of $3.08 annually. YUM! Brands has valuation ratio higher than industry average but investors believe that company EPS growth for the next 5 years will be 14.33% which might justify valuation premium.

The table presents the valuation ratios of YUM! Brands and McDonald's

P/E (NYSE:TTM)

Forward P/E

PEG (5 years expected)

P/S

McDonald's

16.29

14.84

1.91

3.14

YUM! Brands

21.73

19.68

1.57

2.45

Industry

19.00

-

1.24

1.37

Source: Yahoo finance.

Performance:

Last months were very good for shareholders of YUM! Brands, shares of the company are near all time high which is $74.44. Stocks of YUM Brands produced +95.11% return for last five years. 2012 was not a good year for shareholders of McDonald's. Shares of the company outperformed the S&P 500 in most of the periods during 2012.

The table presents the performance of both companies and S&P 500

Week

Month

Quarter

Half Year

Year

YTD

5 Years

YUM! Brands

+4.06%

+5.43%

+13.92%

+5.7%

+40.93%

+27.74%

+95.11%

McDonald's

+3.57%

-1.58%

-0.92%

-3.34%

+2.78%

-11.25%

+49.12%

S&P 500

-0.3%

-0.3%

-0.5%

+6.7%

+21.7%

+12.0%

-2.39%

Source: finviz.com and finance.google.com

Technical analysis:

Stocks of YUM! Brands are in the long term upward trend near all time highs. Buying stocks near resistance $74.44 may be a little too risky for short term investors, but for long term investors who believe in the company growth it should not be a problem. I prefer a strategy of buying shares of YUM! Brands on possible dips towards 50 MA or 200MA. It will give a substantially better risk/reward ratio.

(click to enlarge)

Source: StockCharts.com

Shares of McDonald's are in the medium term downward trend. Shares are below 50MA, and 50MA is below 200MA. There are several possible resistances at: 87$, 88$, 89.28$ and 91.11$; on the way down possible support may be on the 83-83.5$ level. From technical analysis perspective there are no clear signals for purchasing the shares.

(click to enlarge)

Source: StockCharts.com

Summary:

I believe that shares of both companies are attractive long term investments. In both cases we have: good business model, opportunities of further growth especially in countries like China or India, excellent management, good profitability and cash generating. The choice will dependent on your investment style. Shares of YUM! Brands are perfect for traders who prefer growing companies ("Peter Lynch " style of investing), while McDonald's is a more mature and more defensive company, it is excellent for investors who like to buy dividend stocks with lower than average market valuation.

Source: McDonald's Or Yum Brands?