Being an investment analyst and portfolio manager, I am constantly on the lookout for companies that offer good investment opportunities. In this article I take a look at Chipotle (CMG), McDonald's (MCD), Wendy's (WEN), Yum! Brands (YUM), and Starbucks (SBUX) - five restaurant operator companies that may offer investors upside potential that outweighs the risks.
We'll use the management effectiveness ratios, book value-share, price-sales and price-book value to evaluate Chipotle, McDonald's, Wendy's, Yum! Brands and Starbucks.
Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.
Rating System
Buy - Be long
Neutral - No position
Sell - Be short
(The ratings, research and analysis in this article should be considered as starting point for further research.)
Chipotle - Buy
Investors should accumulate shares of Chipotle on valuation. Book value-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.
Although, the macro-economic risks, from potential fiscal consolidation in the US and European Union, could cause valuations to decline further, Chipotle's valuation suggests limited downside. However, Chipotle's valuations could decline if revenue and earnings growth slows.
Some investors may want to protect long positions by buying put or selling call options.
Company v. Industry
- Return on Assets (TTM): 17.22 v. 9.60
- Return on Investment (TTM): 18.79 v. 13.59
- Return on Equity (TTM): 22.75 v. 18.13
Click to enlarge.
Revenue is increasing and forecast to continue to increase; increasing revenue is a bullish sign.
Book value is increasing; an increase in book value is a bullish sign.
Revenue-share is increasing; the increase in revenue-share is a bullish sign.
Book value-share is increasing; the increase in book value-share is bullish.
The share price is rising and is currently coming off of a recent high.
Price-sales is rising and is currently coming off of a recent high.
Price-book value is rising and is currently coming off of a recent high.
Starbucks - Buy
Investors should accumulate shares of Starbucks on valuation. Operating income-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.
Although, the macro-economic risks, from potential fiscal consolidation in the US and European Union, could cause valuations to decline further, Starbucks' valuation suggests limited downside. However, Starbucks' valuations could decline if revenue and earnings growth slows.
Some investors may want to protect long positions by buying put or selling call options.
Company v. Industry
- Return on Assets: 17.70 v. 9.60
- Return on Investment: 23.64 v. 13.59
- Return on Equity: 28.13 v. 18.13
Revenue is rising and is forecast to continue to grow on a year-year basis.
Operating income is trending higher; it is making higher highs and higher lows.
Revenue-share is increasing; the increase in revenue-share is bullish.
Operating income-share is rising; the rise in operating income-share is bullish.
The share price is increasing; although, current the price is declining.
Price-sales is increasing; although, recently the measure of value has declined.
Price-operating income, the valuation metric, is rising; although, recently the ratio has declined.
Wendy's - Buy
Investors should accumulate shares of Wendy's on valuation. Revenue-share increased over the last few quarters. Management isn't currently effective based on the management effectiveness ratios, but management should improve performance in the coming quarters.
Although the macro-economic risks from potential fiscal consolidation in the US and European Union could cause valuations to decline further, Wendy's valuation suggests limited downside.
Some investors may want to protect long positions by buying put or selling call options.
Company v. Industry
- Return on Assets: 0.73 v. 9.60
- Return on Investment: 0.80 v. 13.59
- Return on Equity: 1.46 v. 18.13
Revenue declined and is now rising slowly; the decline in revenue is probably due to the split with Arby's.
Revenue-share is increasing; the increase in revenue-share is bullish.
Book value-share has been relatively flat; recently, the ratio has increased.
The share price is trading well off of its 2011 high and near a key support level at $4.50.
Price-sales is nearing a bottom; the current level of price-sales makes Wendy's an attractive investment.
Price-book value is well off of its 2011 high; the decline in price-book value means the downside to valuation may be limited.
McDonald's - Buy
Investors should accumulate shares of McDonald's on valuation. Operating income-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.
Although, the macro-economic risks, from potential fiscal consolidation in the US and European Union, could cause valuations to decline further, McDonald's valuation suggests limited downside.
Some investors may want to protect long positions by buying put or selling call options.
Company v. Industry
- Return on Assets: 17 v. 9.60
- Return on Investment: 19.34 v. 13.59
- Return on Equity: 38.20 v. 18.13
Revenue is increasing; the increase in revenue is bullish.
Revenue from Europe is increasing; although, recently revenue from Europe is declining, a reflection of the recessionary conditions on the continent.
Revenue-share is increasing; the increase in revenue-share is bullish.
Operating income-share is increasing; the increase in operating income-share is bullish.
The share price is increasing; however, recently the share price has declined.
Price-sales has declined from its recent peak; investors should use the decline in value to accumulate shares.
Price-operating income declined from a recent peak; investors should use the decline in value to accumulate shares.
Yum! Brands - Buy
Investors should accumulate shares of Yum! Brands on valuation. Book value-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.
Although the macro-economic risks from potential fiscal consolidation in the US and European Union could cause valuations to decline further, Yum! Brands valuation suggests limited downside.
Some investors may want to protect long positions by buying put or selling call options.
Company v. Industry
- Return on Assets: 17.21 v. 9.60
- Return on Investment: 23.75 v. 13.59
- Return on Equity: 77.10 v. 18.13
Revenue is trending higher; revenue is making higher highs and higher lows.
Revenue-share is increasing; the increase in revenue-share is bullish.
China revenue-shares is increasing; the increase is bullish.
Book value-share is increasing; the increase is bullish.
The share price is increasing and may be near a peak.
Price-sales is increasing and may be nearing a peak.
Price-book value is relatively flat; notwithstanding, price-book value declined recently.
Macro Environment
ISM non-manufacturing PMI is declining; the index is expected to continue to decline in the coming months.
Non-farm employment change is declining; the pace of job growth is expected to continue to slow.
CB consumer confidence is increasing; the index is expected to decline in the coming months.
European Union flash services PMI is declining; the index is expected to increase in the coming months.
European Union flash manufacturing PMI is declining; the index is expected to increase in the coming months.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
