3 Fast-Food Stocks to Flavor Your Portfolio

by Susan J. Aluise | July 2, 2012 12:00 pm

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[1].

The industry’s top four companies — McDonald’s (NYSE:MCD[2]), YUM! Brands (NYSE: YUM[3]), privately held Doctor’s Associates (which owns Subway) and Burger King  (NYSE:BKW[4]) — 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:

McDonald’s

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[5] — 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! Brands

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.

Burger King

Burger King started out as the Pepsi (NYSE:PEP[6]) to McDonald’s Coca-Cola (NYSE:KO[7]) in the burger market. The company re-emerged as a publicly traded company in June[8] without an IPO. The “Home of the Whopper” boasts 12,500 restaurants and 35,000 employees in more than 80 countries. In 2011, it earned nearly $108 million on $2.3 billion in revenue.

Strategy: The only constant at BKW these days is change, and the company’s latest changes are Whoppers — in more ways than one. Seeking to spark a rebound of its flagging fortunes, the company has embarked on an extreme makeover, as InvestorPlace Editor Jeff Reeves explains here[9]. The chain also is planning 1,000 new restaurants in China, testing home delivery and adding limited-time items to its menu — including the new bacon sundae[10].

Leadership: Burger King CEO Bernardo Hees has been in the job since Brazil-based 3G Capital bought a $3.26 billion stake in the company in late 2010. Hees is presiding over a “four-pillar” strategy to revitalize the brand: marketing, menu, operations and image — all of which have been revamped since the 3G deal.

However, Hees might need to learn a little diplomacy as the company moves to boost its presence overseas. He sparked a firestorm last spring[11] when he shared unpleasant memories of his time in the UK working on his MBA at the University of Warwick. “The food is terrible and the women are not very attractive,” he told students in Chicago. “Here in Chicago, the food is good and you are known for your good-looking women.”

Fundamentals: The new kid (back) on the block, BKW has a market cap of $5.2 billion and is trading around $15, down about 80 cents since it started trading on the NYSE June 20. We’ll get our first peek at earnings on Aug. 8.

The Tastiest Investment Choice: McDonald’s

YUM is selling off a lot of U.S. restaurant real estate[12] to invest more in China, and that could make it feel the impact of China’s slowdown more acutely.

Burger King is in the early stages of its extreme makeover, and with so much changing so fast, we likely won’t have a clear picture of what works — and what doesn’t — for a while.

While MCD also is facing challenges — and Skinner’s retirement at such an important time in the company’s lifecycle might spark early jitters among investors — I think the company has what it takes to deliver solid returns over a long time horizon. New CEO Don Thompson is highly regarded and has what it takes to help boost food quality, while still taking advantage of growth opportunities at home and abroad.

For now, McDonald’s still is the king of fast food.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Endnotes:

  1. “Global Fast Food Restaurants” report: http://www.prweb.com/releases/2012/6/prweb9568740.htm
  2. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  3. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  4. BKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKW
  5. who brings a lot to the table: https://investorplace.com/2012/03/mcdonalds-mcd-ceo-jim-skinner-succession/2/
  6. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  7. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  8. re-emerged as a publicly traded company in June: https://investorplace.com/2012/06/burger-king-stock-bkw-is-back-without-an-ipo/
  9. Jeff Reeves explains here: https://investorplace.com/2012/06/burger-king-stock-bkw-is-back-without-an-ipo/
  10. the new bacon sundae: https://investorplace.com/2012/06/4-things-to-know-about-bks-bacon-sundae/
  11. sparked a firestorm last spring: http://articles.nydailynews.com/2011-03-13/news/29142913_1_largest-railroad-and-logistics-food-chain-bernardo-hees
  12. selling off a lot of U.S. restaurant real estate: http://www.costar.com/News/Article/Real-Estate-On-the-Menu-at-KFC-Taco-Bell-and-Pizza-Hut/135845

Source URL: https://investorplace.com/2012/07/3-fast-food-stocks-to-flavor-your-portfolio-bkw-mcd-yum/