Will Fast Food Rebound After Disappointing Earnings?

Includes: CMG, MCD, PNRA, WEN, YUM
by: Benjamin Goldman

Chipotle Mexican Grill (CMG), YUM Brands (YUM), and McDonald's (MCD) both took hits to their stock prices after disappointing earnings reports. Chipotle shares dropped over 20 percent from disappointing growth, YUM had mixed reviews after beating earnings and missing revenue, and McDonald's shares dropped over 2.5 percent after slowing revenue. After tech delivered generally strong earnings, could these earnings misses be just a coincidence, or will it be an industry wide disappointment?

The last two fast food restaurants that I've been following to report earnings are Panera Bread (PNRA), who reports on July 24, and Wendy's (WEN), who reports on August 9th. Panera has a similar business model to Chipotle, as the company is growing quickly and serves food not typical at quick service restaurants. Wendy's has started its transition to fast casual, but a slow fast food industry could stop the company in its tracks.

With Chipotle's and McDonald's bad news, Panera Bread and Wendy's shares both dropped over 5 percent since last Thursday in anticipation of a disappointing report. YUM Brands shares dropped 3.7 percent after its earnings report as a result of the news. The S&P500 dropped 1.6 percent during this time. Since quick service restaurant chains typically have betas around 0.9, these drops cannot be explained by just a bad market.

Going forward, I believe that Panera will miss earnings while Wendy's should beat earnings. Industry wide growth has slowed and Panera's value is supported a lot by high growth expectations. It may not be able to support 14.9 percent year over year revenue growth and 21.2 percent year over year earnings growth as analysts expect. Wendy's simply has to remain in the black to stay profitable and the higher margins on its new line of food options may be its saving grace. Wendy's earnings per share are expected to stay stagnant over the next two quarters. Right now I recommend staying neutral on Panera and going long Wendy's. For Chipotle, YUM, and McDonald's, I believe they are all now priced with the market and I would put a hold recommendation on all three.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.