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Introduction

In this article, we will look at four of the most recognized fast food providers in the U.S. The well-known branded companies are McDonald's Corp. (NYSE:MCD), Yum! Brands Inc. (NYSE:YUM), The Wendy's Co. (NASDAQ:WEN), and Jack in the Box Inc. (NASDAQ:JACK). We will look at some historical performance indicators, forward growth estimates, and macroeconomic issues in an attempt to determine which stock is the best bet for now?

Tracking Financials

Here are the four companies for our analysis:

McDonald's

Yum! Brands

Wendy's

Company

Jack in the Box

Market Cap

$90.7 bil

$29.3 bil

$1.9 bil

$1.2 bil

Price/Earnings ttm

17.1

19.1

N/A

20.49

Price/Sales

3.4

2.4

0.8

0.9

Price/Book

6.6

14

1.0

3.0

Forward P/E

15.7

17.6

27.9

14.7

5 Year Growth Forecast

9.2%

11.4%

20.4`%

12.0%

Dividend Yield

3.39%

1.97%

3.39%

--

ROE

40.01%

77.14%

-0.77%

14.1%

Operating Margin

31.08

16.89

4.81

7.28

Debt/Equity

0.92

1.37

0.73

0.98

Current Price

$90.96

$65.04

$4.74

$28.74

Estimated Fair Value Range

$81-$95

$57-$62

N/A

$26-$36

Stock Valuation

Fairly Valued

Overvalued

N/A

Fairly Valued

Upside Potential (Premium) to Reach a Fair Stock Value

--

5%

N/A

--

Data from Morningstar on January 9, 2013

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the four competitors, suggests that currently, both McDonald's and Jack in the Box stocks are fairly valued. In addition, EFS' fair stock price valuation indicates that slightly overvalued Yum! Brands is trading at least a 5% premium over the fair value range.

What Does 2013 Have In Store For Fast Food Companies?

As we begin 2013, fast food operators of all sizes are facing potential margin pressures due to rising food costs. Corn has become arguably the most important food commodity in the world. Corn goes into thousands of food products, and is also used as livestock feed. According to the USDA 2012-2013 Food Price Outlook, the devastating drought in the U.S. Midwest this past summer is set to send household food prices spiraling upward by 3-4%.

Both McDonald's and Yum! Brands generate cash flow in the billions, and are better positioned to withstand commodity price increases than smaller competitors like Wendy's and Jack in the Box with cash flow generation in the millions.

McDonald's is the proverbial "800 pound gorilla" in this space. Despite its size and market penetration, the company still has very attractive forward valuations with a Forward P/E of 15.7 and forecast growth of 9.2% over five years. The company's Q3 2012 earnings release managed to beat analyst estimates, but lagged behind year-over-year results. Analyst EPS estimates were at $1.38 per share, but came in higher at $1.43 per share. Reported revenue of $7.15 billion handily beat the estimated $6.94 billion. However, revenue dropped 0.2% and net income fell 3.1%. October same store sales figures released on November 10, 2012 showed a drop of 1.8%, the first monthly decline in nine years.

However, on December 10, 2012, the figures for November same store sales surprised investors with a reported 2.4% increase globally. Right now, the company is planning on entering the "wings" market, a move that led analyst firm Sterne Agee Group to reiterate its BUY rating on MCD and raise the price target to $101.

Although the 5-year growth forecast for McDonald's is the lowest of any of the four companies in our table, the dividend yield is also the highest. During the last five very challenging years, MCD has maintained an average yield of 2.9%.

Yum! Brands has a diversification advantage over McDonald's and the other companies in our table with solid brands including Pizza Hut, Kentucky Fried Chicken, and Taco Bell. YUM's largest market is China, where KFC remains the number one fast food operation. In fact, YUM derives 40% of its revenue from its operations in China, including Pizza Hut as well as KFC.

It is no wonder then that on January 7, 2012, YUM stock dropped 4.3% in response to news that the company's already dismal Q4 forecast of a 4% decline in China sales was being revised lower, to a 6% drop. The problem stems from food safety investigations of some of YUM's chicken suppliers in China.

At the time news of the trouble hit the market, YUM was trading around $75 and is down around 13% since then and still falling. If you believe there is money to be made when there is blood in the streets, right now could be the time to buy YUM. The company has increased dividend payments every year for the last 8 years, beginning in 2004 with a payment of $0.10 per share up to the current $1.14 per share. In addition, the company has increased net income and earnings per share every year over the same period.

The Wendy's Company has gone through turbulent times in the last few years, first buying and then selling fast food rival Arbys. But since the arrival of a new CEO, a former employee of YUM! Brands, the company appears to be rebounding. As of March 2012, Wendy's edged ahead of Burger King to grab the number 2 spot in hamburger fast food chains behind industry leader McDonald's. In contrast to McDonald's, the Q3 earnings release from Wendy's was primarily positive. Same store sales increased 2.7% and revenue increased 4.1%. A pretax write off of $49.9 million resulted in declines in net income and earnings per share.

Wendy's is strictly a growth story, as evidenced by its leading forecast of 20.4% growth, the highest in our table. The company is in the midst of a classic turnaround story. If you are one who believes in customer reaction as the ultimate indicator of a stock's potential, WEN may be the investment for you. A 2012 ZAGAT SURVEY® rated Wendy's as the "Top Overall Mega Chain." A part of the respected University of Michigan Customer Service Satisfaction Survey also gave Wendy's a top ranking for hamburger chains.

Jack in the Box Inc. has the highest current P/E of any stock in our table at 20.9, along with the lowest Forward P/E at 14.7. However, the 5-year growth forecast of 12% is solid, and potential investors were encouraged by a 100k insider buy in November from a JACK board member. Jack in the Box is yet another fast food operator in the midst of a "turnaround" story. The insider buy is one indicator of potential success. Another is some bullishness from analysts, with JACK making at least one top 10 list of restaurant stocks for 2013.

However, if you look at a five year history of company financials, you can see revenues declining every year for the past five years.

Final Verdict

These four companies offer something for all types of investors. Growth investors should be attracted by Wendy's potential, and to a lesser extent, Jack in the Box as well. Both McDonald's and Yum! Brands merit a place in any income investor's portfolio. Both are solid performers with room for growth. Right now, YUM! Brands' negative news from China makes it a good candidate for buying on the dips.

Source: Which Fast Food Stock Will Be A Winning Bet In 2013?