by Lawrence Meyers | November 8, 2012 2:20 pm
We’ve all craved a McDouble or Whopper at some point or run through one of those fast-food burger chains because we were hungry and short on time. And we all definitely love the low prices of their meals.
But are their stocks as delicious as their offerings?
Some of my extended family members have owned McDonald’s (NYSE:MCD) franchises and one told me the other day: “When the economy is good, we do good. When the economy is bad, we do great.” That definitely sounds like a business to be invested it.
Still, it’s good to be cautious — and choosy. Between Ronald McDonald, Burger King (NYSE:BKW) and Wendy’s (NYSE:WEN), you have three different flavors within this this sector. Let’s take a look at all three:
McDonald’s remains the Big Mac, so to speak. Despite today’s report of its first global same-store sales decline, the Golden Arches are still an $87 billion company with 420,000 employees, $2.17 billion in cash, $12.7 billion in manageable debt and $3.7 billion in free cash flow.
There’s almost no question that McDonald’s will be around forever, so it’s as safe an investment as you are going to find — and today’s news doesn’t really change that assessment. It may be a bad overall tiding for the world economy but — even if that is the case — people will still need to eat. And chances are, many will eat at McDonald’s.
The real question, though, is whether McDonald’s is too pricey to buy in. As of now, it looks like a buy regardless of your time horizon. If you intend to hold McDonald’s for thirty years and pocket the (current) 3.5% yield, go ahead and place your order.
If your time horizon is shorter, not much changes. I see 12% compounded growth over the next five years. Giving the company a premium to the point where it deserves a 14x multiple, then 2017 earnings would be $9.81. Fair value in 2017 would be $137. That’s a very reasonable return.
Burger King was private for all of 18 months and returned to the public markets in June without an IPO. The company reported its first quarter with very modest system-wide comparable sales growth of 1.6%. Since going public, the stock has gained a meager 1.9%.
If you’re buying into this popular fast food company, you are betting that McDonald’s smaller rival will be able to take over market share in the coming years.
Indeed, if the decline in same-store sales at McDonald’s is complemented by a surprising uptick in Burger King’s, then the latter may be making inroads. Anything is possible, and consequently, the potential for larger capital gains than McDonald’s might offer is a good reason to go long here.
Wendy’s, which also includes the Arby’s brand, is in the midst of a turnaround. Revenue had been getting slaughtered in the last year, falling between nearly 30% year-over-year in recent quarters. The good news is that the company is expected to see a climb 4.6% next quarter.
Still, things don’t look that great. The company is looking at a net income estimate of 5 cents a share, has $521 million in cash and $1.39 billion in debt that is comparatively expensive at about 8% annually. The company barely eeked out positive free cash flow in the TTM.
If you’re buying Wendy’s, you are buying a multi-year turnaround and must be comfortable with the high risk. Of course, it could mean a high payoff. Carl’s Jr. went through a turnaround a few years ago before going private and investors were handsomely rewarded. The book value of the company is $5.10 and the stock trades at $4.26, so if the turnaround is successful, it is definitely possible the stock could double or triple over the course of a few years.
As of this writing, awrence Meyers did not own a position in any of the aforementioned securities.
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