Which Stock to Pick - Cramer's Mad Money (8/18/08)

Includes: BK, COH, MCD, TIF
by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Monday, August 18.

McDonald’s (NYSE:MCD) vs. Burger King (BKC)

Even before picking apart the companies, though, Cramer recommended looking at the sectors. Money managers always look for a sector that will outperform the market as measured by the S&P 500. And this is important because 50% of a stock’s performance depends on its sector.

  • We know that during tough economic times that people tend to trade down, seeking out discounts in all areas of their lives, so cheaper restaurants like McDonald’s and Burger King should do well, and more importantly, better than the S&P. So each company gets three points for being in the right place.
  • Growth is like crack on Wall Street. This is what the big money guys value above all else. They ask pertinent questions such as these: How fast in the industry growing? Are these companies growing faster than the industry? Is there still room for more growth? You want to try to be predictive here. Burger King appears to be growing faster than McDonald’s and the former has less exposure overseas (McDonald’s is already in 110 countries). That means there is much more expansion potential for Burger King. Score three points for BK and 1.5 for MCD: 6-4.5.
  • In terms of consistency, the scales have to tip in McDonald’s favor. And Burger King’s only been public since May 2006. Give McDonald’s a point, bringing the totals up to 6-5.5.
  • McDonald’s also wins when you compare dividends. A dividend accounts for as much as 50% of what a stock returns to you over time, Cramer said. McDonald’s 2.4% beats Burger King’s 0.9%. Plus, McDonald’s has a history of raising its dividend. Award one more point for McDonald’s: 6.5 to Burger King’s 6.
  • We also look at raw costs, and how each company is handling them. This is important because raw costs result in either higher prices for consumers or less profit for the business. Hands down, McDonald’s wins this category. Just look at the trailing 12-month operating margins: 26% versus Burger King’s 14%. And last week MCD CEO James Skinner told us that his company is using its size to get lower prices for commodities. Give McDonald another 1.5 points for this and Burger King nothing. That puts the score at 8-6, McDonald’s.

So McDonald’s the winner. But still the market values Burger King at 19 times earnings while McDonald is earning a multiple of only 18. That’s wrong, Cramer said. And the work we just did proves it.

Tiffany & Co. (NYSE:TIF) vs. Coach (NYSE:COH)

Sector matters the most. Money managers look for sectors that will outperform the S&P 500. Sectors are important because they account for 50% of a stock’s performance. So when you’re considering retail names like Tiffany and Coach, you have to think about that sector’s potential in this environment. Inflation no longer seems to be a concern to the Federal Reserve and that frees the central bank to cut interest rates.

  • So at first glance, there’s reason to think the big money will look at retail as a recovery play. But both the American and Japanese economies – the second biggest market for Tiffany and Coach –aren’t on solid ground yet.Since a stock get five points in Cramer’s rating system for sector alone, he’s giving both companies 2.5 points.
  • When it comes to growth, there’s no question Coach, with a 16% long-term growth rate to Tiffany’s 13%, is the better performer. Give 2.5 points to Coach and one to Tiffany. Score: 5-3.5 in favor of Coach.
  • Coach wins in the consistency category as well. The company’s brought in new designers more recently and Cramer’s a fan of CEO Lew Frankfort. So Coach gets half a point here to Tiffany’s none. Score: 5.5-3.5, in favor of Coach.
  • Tiffany gets a half point for actually having a dividend, one worth 1.6%. Coach gets none for having none. Score: 5.5-4, Coach.
  • Raw costs and how companies handle them – especially in this environment – should always get a good look, too. For the fiscal year ending July 29, Coach’s operating margins were 37% versus 19% for Tiffany. No real contest there – Coach controls its costs better. Score: 6.5-4, Coach.

So Coach is clearly the winner here. But how is Wall Street valuing these stocks? Tiffany trades at 12.7 times forward earnings compared to Coach’s 11.7. So the Tiffany actually has a higher multiple despite Coach’s outperformance. According to our calculations, something’s wrong here. Still, retail is an iffy proposition right now, so proceed with caution if you’re considering buying Coach. But ultimately, at least according to this rating system, and it’s one that the big money guys use, Coach is a better stock than Tiffany right now.

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