Seeking Alpha
Profile| Send Message|
( followers)  

I do not watch "Mad Money" that often but I found it interesting the other day when Jim Cramer was promoting three different fast food stocks within the same segment. It may have been the Lightning Round, I do not recall exactly; regardless he claimed that two were excellent growth picks and the other was a long-term dividend appreciator. Now, it shouldn't take you very long to guess which stocks he was talking about and I thought I would elaborate on the three picks, plus one more, and attempt to distinguish them from each other in terms of growth prospects.

There are really only a few things going on in the news right now that people seem to care about; those being the Facebook (FB) IPO, the JPMorgan (JPM) fiasco, and the European banking crisis dragging the American markets down. With this in mind while discussing fast food stocks, I think it is important to note exposure to the European community as a factor in determining prospects. Other factors include how much the stock has recently sold off, how well the company spends money, and simple figures like price-to-earnings. I should also note that all of these stocks are selling off as I am writing this, so the figures are as accurate as possible.

McDonald's Corp. (MCD) - It's pretty astonishing that among the 4 stocks on this list, McDonald's is the furthest off its 52 week high. However, McDonald's drop is not solely due to happenings in Europe. It began in January when the stock ran up to triple digits a bit too quickly ahead of an earnings report. Since then its been all downhill. What's odd is that neither earnings calls since the start of the year were that bad. The first beat consensus by 3 cents and showed year over year growth. The second, last month's, only met analysis' expectations and guidance was not as great as usual, so the stock has continued to slide.

McDonald's also has the most exposure to European countries and while it may be argued that economic turndowns actually help fast food companies I do not think this will be the case. I would agree that stores will be able to maintain sales, especially with appropriate promotions, but franchising and more importantly, the lending to back will decline.

Luckily there are McDonald's all over the world and they should not be as affected. Other things we know is that (1) McDonald's is the largest fast food company by leaps and bounds, (2) their dividend has been growing for decades at a decent pace, and (3) they have the best profit margins in the game. Jim Cramer explicitly said that he thinks McDonald's is a definite buy if it is yielding between 3 and 5%. Over the last few months the yield has crept up from 2.7% to 3.1% as of right now. That's pretty good for a company that you don't have to worry about being okay in the long-run. Plus, they are the cheapest of the 4 in P/E, but that metric doesn't really help to compare established companies like McDonald's to growth stocks.

Panera Bread Co. (PNRA) - Panera being down 12% off its 52 week highs makes much more sense than McDonald's considering its speculative growth nature and lack of a dividend. The stock has fallen from $166 to $146, and looks mighty enticing right now.

My biggest reason for this is that Panera has no European exposure and as long as the American economy is treading water/improving Panera should be okay. Their stores have steady sales figures and people see them as a definite step up from the McDonald's and Wendy's (WEN) of the world. The company is still relatively small with only 1,500 or so units, so there is room for growth and their P/E (30) is far lower than the other growth stock on this list. A key drawback is that they have the lowest profit margins, 7.6%, of the four; but this is also something that can be improved upon, considering commodities costs should hit all of these companies equally.

Chipotle Mexican Grill (CMG) - Chipotle is third on this list because it will not have as much of a recovery jump as the two stocks above, but it's growth prospects should remain just as high as prior to their dip, which is just over 10% from their high of $442.

Chipotle only has one location in Europe (London) and another on the way in Paris. I doubt that the success of these two stores will have a great effect on their bottom line, and they will probably not affect future locations because Chipotle does not franchise their stores. Chipotle does trade at a rather high P/E, 54, but this has been met with rising quarterly earnings over the last several years. Expectations are very high for the remaining two quarters (to the tune of 40% YoY for their July earnings) and if they are met/exceeded then the stock could certainly continue to soar.

Yum! Brands (YUM) - Yum comes in fourth on this list because they are still relatively strong and have only dropped 8.5% off their high of $74, which was short lived since Yum spent a lot of time in the $72 area. Based on those numbers I would think Yum is more of a hold than a buy, but the stock is in an odd state of limbo right in the middle of the spectrum between Chipotle and Panera on one end and McDonald's on the other. Yum pays a dividend, but it is only 1.6%. Their P/E is not great since it is over 20, but it is not outrageously high.

The biggest challenge facing Yum is recovering American sales. Their franchises are performing very well overseas (Pizza Hut in India and Kentucky Fried Chicken in China) but American sales are either stagnant or declining. I'm not really sure if there is a way to fix that since they are sort of outdated in comparison to say Domino's (DPZ), and KFC is very unhealthy. They do still have Taco Bell which I guess is their saving grace. Anyway, Yum has ridden the Chinese wave the past few years and that was a key reason why the stock is a big Cramer favorite.

That is how I would rank Cramer's favorite fast food stocks. I would be hesitant in making any purchases right now because it seems like the market has not yet reached its bottom, but we can only hope that that happens in due time. Lastly, Starbucks (SBUX) was not included since they are not really fast food, but Cramer is also hot on them and the stock is down 16% off its highs. The Starbucks graph is pretty ugly right now and it looks like they could be had for under $50 in a few days. Their numbers are very similar to Yum's but obviously have a stronger following in America.

Source: Ranking Cramer's Favorite Growth Picks In Fast Food