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In this article I take a look at Chipotle (NYSE:CMG), McDonald's (NYSE:MCD), Wendy's (NASDAQ:WEN), Yum! Brands (NYSE:YUM), Starbucks (NASDAQ:SBUX) and Green Mountain Coffee Roasters (NASDAQ:GMCR) - six companies that may offer investors upside potential that outweighs the risks. We'll use the management effectiveness ratios, book value-share, price-sales, price-book value, etc... to evaluate them.

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.

With the recapitalizing of Spain's banks, European Union officials are clearing the path for the "risk-on" trade to resume. Consequently, the minor low formed last week by equity markets in the US may hold; that next major test could come from the Greek election process. While the risk of Greece exiting the Euro remains, the election process may have been discounted by investors. That said, the "risk-on" trade should continue.

Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, sovereign risks remain.

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.

According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is just over one.

Total revenue in the first quarter, compared to the year-ago quarter, increased substantially.

In the first quarter of 2012, earnings weren't high quality. Additionally, cash from operations wasn't enough to cover cash used in investing; the firm is generating cash from financing.

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 : 18.79 v. 13.59
  • Return on Equity : 22.75 v. 18.13

(click to enlarge charts)

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.

According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is roughly 1.5.

Total revenue in the first quarter, compared to the year-ago quarter, increased substantially.

In the first quarter of 2012, earnings weren't high quality. Additionally, cash from operations was enough to cover cash used in investing and financing.

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

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.

According to the firm's financial statements, current assets decreased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is roughly 2.

Total revenue in the first quarter, compared to the year-ago quarter, increased.

In the first quarter of 2012, earnings weren't high quality. Additionally, cash from operations wasn't enough to cover cash used in investing and financing.

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

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.

According to the firm's financial statements, current assets decreased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is just over 2.

Total revenue in the first quarter, compared to the year-ago quarter, increased.

In the first quarter of 2012, earnings were high quality. Additionally, cash from operations wasn't enough to cover cash used in investing and financing.

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

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.

According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is roughly 4.

Total revenue in the first quarter, compared to the year-ago quarter, increased.

In the first quarter of 2012, earnings were high quality. Additionally, cash from operations wasn't enough to cover cash used in investing and financing.

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

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.

Green Mountain Coffee Roasters -- Neutral

Investors shouldn't accumulate shares of Green Mountain Coffee Roasters as shares are in a secular bear market and valuations are misleading. However, book value-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.

According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is roughly 1.5.

Total revenue in the first quarter, compared to the year-ago quarter, increased.

In the first quarter of 2012, earnings were high quality. Additionally, cash from operations was enough to cover cash used in investing and financing.

I may change my rating on Green Mountain to "buy" once the investor base changes.

Company v. Industry

  • Return on Assets: 11.06 v. 7.55
  • Return on Investment: 12.90 v. 14.39
  • Return on Equity: 20.61 v. 21.89

Book value-share is increasing; the increase is considered bullish.

The price of common equity shares is declining; the decline in share price is secular.

Price-sales is declining; the decline is mostly caused by a decline in share price. I do not consider this stock undervalued as the long-term trend is down.

The price-book value ratio is declining; the decline is mostly caused by a decline in share price.

Macro Environment

ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.

The pace of job growth has slowed in recent months and may stabilize at low levels.

CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined, according to the latest report.

European Union services PMI is declining and should increase in the coming months.

European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial adviser. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.

Source: Valuing 6 Restaurant And Coffee Stocks