The release of non-farm payrolls spurred investors to bet that a slowdown in hiring will restrain the wage growth needed to fuel consumer spending in the U.S.. Investors are wrong. The unemployment is slowly declining and as unemployment declines wage growth will increase. As wage growth increases consumers will spending more money eating out; two firms that are well positioned to benefit from an increase in eating out are McDonald's (MCD) and Chipotle Mexican Grill (CMG).
McDonald's - Buy
McDonald's is a mature company that benefits from sales in high-growth markets; the firm is leveraging its size and brand to expand in developing markets like China and India.
The restaurant industry is fragmented with weak pricing power. Although, McDonald's has been able to build a brand in the fragmented industry that is an intangible asset for investors.
The maker of the Big Mac is a low-price producer which serves as a substitute for high-priced producers. As such, the enterprise's revenue isn't strongly correlated with the business cycle.
McDonald's is competing with the likes of Starbucks (SBUX) in the cafe beverages category; café beverages is a growing category.
Sales should be boosted by a recovery in Europe during the second half of the year. The impact won't be huge as interest rates and credit availability don't materially impact the firm's sales in the region. Additionally, the firm shouldn't be materially adversely impacted by a slowdown in government spending in developed nations.
Compared to competitors McDonald's is a high-margin enterprise. Although, food price inflation could materially adversely impact the firm's margins.
McDonald's is transforming its menu to meet changes in social attitude towards unhealthy food.
Chipotle Mexican Grill - Buy
The enterprise is a high-growth firm, in a high-growth category of the restaurant industry. Overall, the restaurant industry is fragmented with weak pricing power.
Chipotle is a developing brand that could be a substantial intangible asset for investors. Chipotle restaurants sell relatively low priced items which is a substitute for high-priced restaurants. Additionally, the firm's correlation with the business cycle isn't strong.
An interest rate increase or decline in credit availability shouldn't materially adversely impact sales. The slowdown in government spending in developed nations shouldn't materially adversely impact revenue.
Food price inflation could cause margins to decline as could a shift away from relatively healthier food items.
Value ratios may be high; although, investors are paying a premium for growth.
According to the principles of Dow Theory we are still in a bull market. Although, business conditions in the US have been less good recently; a secondary reaction could occur in the next few months.