What follows is a list of restaurant chains that will be prime beneficiaries of an economic recovery. While I expect McDonald's (MCD) to outperform Yum (YUM) and Wendy's (WEN), I am even more bullish about under-followed restaurant firms. UFood Restaurant Group (UFFC.OB), for example, is an undervalued gem that is just starting to gain the Street's attention. With the firm valued at almost a tenth of where it was just three years ago, it has surely hit a bottom. My call: long MCD and UFFC.OB. All ratings are sourced from NASDAQ.
McDonald's trades at a respective 18.5x and 15.5x past and forward earnings with a dividend yield of 2.9%.
Consensus estimates for McDonald's EPS forecast that it will grow by 8.7% to $5.73 in 2012 and then by 10.3% and 10.4% in the following two years. Assuming a multiple of 19x and a conservative 2013 EPS of $6.26, the rough intrinsic value of the stock is $118.94, implying 21.8% upside. The company had a strong close to the year with global comparable sales growth of 5.6%. While inflation, tax, and FX headwinds will hinder some value creation, the brand is still positioned to maintain its dominant share in all key geographies. Further, December performance was the best in more than a half decade. This stock is recommended mostly to risk-averse investors.
Yum is rated a "buy" and trades at a respective 25.6x and 18.8x past and forward earnings with a dividend yield of 1.6%.
Consensus estimates for Yum's EPS forecast that it will grow by 13.9% to $3.27 in 2012 and then by 14.7% and 16.3% in the following two years. Assuming a multiple of 19x and a conservative 2013 EPS of $3.72, the rough intrinsic value of the stock is $70.68, implying 0.7% upside. Like McDonald's, Yum had strong performance in the most recent quarter with 14% EPS growth, which was the tenth year that management exceeded its 10% target. The firm has a significant stake in China - the emerging market makes up more than half of Yum's EBIT. In light of this exposure, Yum significantly hedges against domestic volatility.
Wendy's is rated a "hold" and trades at a respective 126.3x and 23x past and forward earnings with a dividend yield of 1.6%.
Consensus estimates for Wendy's EPS forecast that it will grow by 46.7% and 27.3% in the following two years. Assuming a multiple of 30x and a conservative 2012 EPS of $0.19, the rough intrinsic value for the stock is $5.70, implying 12.9% upside. The firm recently became the number #2 hamburger restaurant in terms of revenue, but McDonald's still had 2011 sales that were double that of Burger King and Wendy's combined. Wendy's is trying to update its brand. Towards that end, the release of new products like Dave's Hot n' Juicy Burger have thus far been a major hit. Combined with an aggressive store remodeling plan, the company is largely a turnaround play and thus carries significant risk. In light of the safety and upside that McDonald's offers, I recommend avoiding Wendy's for now.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.