In government and media circles, fast food is turning into the new tobacco — the hefty consumption of burgers, fries and soft drinks is increasingly tagged with ills ranging from childhood obesity to diabetes.
Still, industry analysts confirm that there is a super-sized global market for fast food. Sales will total nearly $707 billion in 2012 and comprise 38% of the global food service market, according to IBISWorld’s new “Global Fast Food Restaurants” report.
The industry’s top four companies — McDonald’s (NYSE:MCD), YUM! Brands (NYSE: YUM), privately held Doctor’s Associates (which owns Subway) and Burger King (NYSE:BKW) — will account for nearly one-fourth of all fast-food sales in 2012.
But despite the opportunity for these companies to accelerate the push into emerging markets like China, growing local competition and a high level of fragmentation could pose a threat to the global chains’ growth by 2017.
Still, fast-food restaurants won’t fade from view anytime soon. They fill an important role in the lives of fast-foodies and time-crunched families, so picking the right stock in this sector can be a healthy addition to your portfolio.
As with fast-food menu items, some choices are better for you than others. Here’s how the top three publicly traded fast-food giants stack up — and which one looks tastiest for investors:
The burger franchise Ray Kroc incorporated in a Chicago suburb back in 1955 is now the world’s largest fast-food company in terms of revenue with $27 billion in 2011. It also reported $5.5 billion in earnings and boasts 33,000 restaurants in 119 countries, plus 1.7 million employees — more than half of which are located outside North America.
Strategy: Such global diversification has been a boon for the company because it has helped insulate MCD shareholders from some of the recent economic fits and starts in the U.S. Strong exposure to Europe has been a challenge for MCD of late, but Japan is a notable bright spot — McDonald’s is catering to that market with unique items like tuna breakfast muffins. Another challenge, though, has been China, which helped push MCD’s same-store sales in the Asia-Pacific, Middle East and Africa regions down 1.4% in May.
Leadership: Jim Skinner, a 41-year McDonald’s veteran whose eight-year reign as CEO saw MCD stock rise 264%, announced his retirement in March and took off his crew cap for the last time Saturday. COO Don Thompson — MCD’s first African-American CEO who brings a lot to the table — replaced Skinner.
Fundamentals: MCD has a price-to-earnings growth ratio of nearly 1.6, indicating it could be overvalued, but an extremely attractive forward P/E of just more than 5, thanks in part the the company shedding about 12% so far this year. MCD continues to remain attractive to long-term investors, boasting a 3%-plus dividend.
YUM, which includes the Taco Bell, KFC and Pizza Hut brands, is the largest fast-food chain in terms of locations: 37,000 restaurants in 117 countries and more than 1 million employees. The company reported $12.6 billion in revenue and $1.3 billion in earnings in 2011.
Strategy: YUM is keenly focused on opportunities outside the U.S. — particularly in China and India where it has benefited from strong growth. But the slowdown in BRIC countries is a clear and present danger and YUM has been lowering prices to compete for customers. With persistent high commodity costs, that trend could weigh on earnings as the year progresses.
Leadership: David Novak has been YUM’s CEO since 2000 and its chairman since 2001. Novak has been the visionary pushing the chain globally. In 1997, only 20% of the company’s profits came from outside the U.S.; that number is 70% today.
Fundamentals: YUM is about a third the size of McDonald’s, but at almost $30 billion, it’s still an enormous company. It also has a sizable valuation — its forward P/E is a hefty 19. YUM also offers some income potential, but at 1.8%, not nearly as much as MCD.