Investopedia Advisor submits: With the North American economy slowing, high-end restaurant chains could see a marked slow down in business over the next year. But fast food businesses should still fare well thanks to both convenience, and comparatively low prices. To that end, below is a list of some of the more popular fast food restaurant chains, and what I view as their fundamental outlook over the coming year.
McDonald's (NYSE:MCD): McDonald's has received some bad press over the past few years due to a number of issues. First, it hasn't kept pace, or shall I say hasn't taken a clear lead as it has in the past, when it comes to snappy new advertising, and menu additions. In addition, in terms of aesthetics, McDonald's seems to have fallen behind the curve as well, particularly with all of these new concepts such as Quiznos, and Chipotle Mexican Grill (NYSE:CMG) expanding their store footprints, and showing off their flashy in-store decor.
Still, I think the stock is attractive at current levels. Here's why:
McDonald's Remains A Market Leader. True, some existing McDonald's stores might not be as attractive as their new-fangled counterparts. But McDonald's is often the first fast food chain to get a foothold in an emerging market. Just look at the announcement the company made earlier this month about expanding into China. On June 20th the company announced a deal with one of China's largest gasoline retailers, Sinopec to open drive-through stores along major highways throughout the country.
At present, McDonald's has about 750 stores in China, (which, for the record is less then half the store base that KFC, one of its staunchest competitors in Asia, maintains). Still, I like the fact that McDonald's will be breaking out of metropolitan cities and into the country-side, as more and more Chinese are starting to drive.
In other words, in the short run, this deal will not have a huge impact on McDonald's overall sales numbers. But going forward as this market develops, I think it could be a big catalyst for earning down the road. Plus, it’s a good sign that the company is always trying to be one step ahead of its competition.
Another factor that few investors seem to consider is McDonald's real estate horde. At present the land that McDonald's owns under its huge 30,000 store base is pegged at $30 billion on its balance sheet. Of course, the land is recorded at cost and is likely worth more. But even at $30 billion, that's just shy of the $42 billion market cap the company is currently valued at by investors.
In other words, it seems to me that if you factor in the $2.21 a share and the $2.38 a share the company is expected to earn in 2006 and 2007 respectively, and the 2.1% annual yield on the dividend the company pays, this stock is worth more. Much more. Realistically, on earnings alone I think the stock is worth $40 a share over the next year. And, if Wall Street ever figures out the value of Mickey D's real estate, forget it. I wouldn't even want to speculate on the upside.
Burger King (BKC): Burger King is trying. I give them that. They launched a successful Super Bowl ad this past year, introduced new value driven menu items, and they are trying to expand their international footprint. But by comparison to McDonald's, I just can't justify buying this stock. And it appears that others agree with me. Since its May IPO at $17 a share, the stock has actually dropped about 10%. Not a good sign.
Wall Street figures the company can earn 87 cents a share, and $1.01 a share in 2006 and 2007 respectively, which is a decent growth rate. But unless the shares came down to the $10 to $12 range, I'd stay away right here. Again, I think the company will clearly do better then some of its higher end counterparts in this economy. But I just don't see a near term, or frankly a long term catalyst that will drive the stock materially higher.
Wendy's (NASDAQ:WEN): Wendy's issued a press release on June 27th saying that through job cuts, and with the realization of other inefficiencies it can save as much as $100 million a year. That's a good thing, and I'm not sure those kind of numbers are fully reflected in Wendy's earnings, which are currently pegged at $2.20 and $2.70 a share in 2006 and 2007 respectively.
Still, I think the company pales in comparison to its chief burger making rival, McDonald's. It simply can't afford to grow internationally at the same clip as McDonald's. And its prices are fairly high, which I think is a risk in a slowing economy. However, simply put I do like the company. I also like the fact that it's been able to differentiate itself from some of its competitors by taste, and store decor.
And I think Wendy's spin off of Tim Horton's (NYSE:THI) was a good idea because of the value the Tim Horton's chain can realize as a stand-alone. But I would wait for a pullback of 10% to 15% before jumping in.
Tricon Global (NYSE:YUM): For those unaware, Tricon Global consists of five concepts: Taco Bell, KFC, Pizza Hut, Long John Silvers, and A&W All American Food Restaurants.
Here's why I like the stock:
In my mind, its most attractive feature is that it has a very broad geographic footprint both domestically and internationally with some 34,000 locations in more then 100 countries. This means it isn't as susceptible to regional economic slowdowns as some of its smaller competitors may be. Also, the fact that it offers such a diverse array of food products is also good, because it gives the company a much broader potential audience.
Wall Street figures the company will earn $2.83 and $3.14 in 2006 and 2007 respectively. But historically speaking, Tricon Global has a knack for minimizing expectations, and then beating estimates. So I think these numbers could be conservative. In any case, I think the shares are undervalued by 10% to 20% from current levels. It's not a tremendous bargain. But below $51 I'd be a buyer.
By Glenn Curtis, Contributor - Investopedia Advisor
Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.
At the time of release Glenn Curtis owned no shares in any of the companies mentioned in this article. Click here to read the Investopedia Advisor's full disclosure policy.