4 Tasty Ways to Bite Into the Burger Business

Prepare yourself for a summer war between fast-food joints

   
4 Tasty Ways to Bite Into the Burger Business

Wendy‘s (NASDAQ:WEN) first-quarter earnings announcement was a mixed greasy bag that perhaps previewed a theme we could be seeing in the next couple months.

Namely, in Q1, Wendy’s lost market share in the value category — which accounts for about 20% of the fast-food industry. And with food prices relatively tame, a price war could erupt over the summer.

Who will win the burger wars this summer, and more importantly, which burger stocks should you own? Read on, and we’ll look at the tastiest options.

The Best Performer

The best performing burger stock year-to-date is … drum roll, please … Red Robin Gourmet Burgers (NASDAQ:RRGB).

When you look at the firm’s total revenues in comparison to its comp sales, it’s quickly apparent what is going on with its business. In the case of Red Robin, its Q4 2012 total revenues increased 16.8% to $240.7 million, while its comp sales at company-owned stores were up 1.4%.

Generally, when there’s a big gap between the two, it’s because the business is opening lots of new locations whose sales aren’t comparable for at least the first 13 months. Red Robin opened three company-owned locations in the fourth quarter and 12 for all of 2012. This year, it plans to open 20 company locations in underserved markets in Florida and Texas.

While revenues are growing at a good pace, it’s what RRGB is doing on the bottom line that is most impressive. During the past two years, its restaurant-level operating profit margin has increased 290 basis points to 20.7%. In fiscal 2012, its adjusted EBITDA increased 12.7% year-over-year to $104.4 million.

With a commitment to managing costs and an expansion plan that includes opening some smaller restaurants, CEO Stephen Carley’s has done a good job in his two-plus years at the helm.

The Next Best

The second best performing burger stock year-to-date is Jack in the Box (NASDAQ:JACK), up 31%. Technically, it’s not a pure-play burger joint as it also owns Qdoba Mexican Grill, but the burger-flipping side delivered 79% of its overall revenue in the first quarter and 94% of its operating profits, so it’s close enough.

In the quick-service restaurant burger business, Jack in the Box has 10% market share across all markets it exists in, second only behind McDonald’s (NYSE:MCD) at 40%. In its home market of San Diego, its share is almost as large as the Golden Arches. By refreshing the look of its restaurants and menu while also improving its service, JACK has managed to keep its comp sales growing over the last couple of years. That clearly has had a positive effect on its stock price, which has improved by 66% in the past 52 weeks.

What makes JACK such a good investment is that it acts like an annuity, with 89% of its franchise locations paying rent to the company, which owns the real estate. Speculation in Canada is that Tim Hortons (NYSE:THI) will look to spin off its real estate into a REIT to unlock shareholder value. That cuts both ways, though. When times are a little tough,  Timmy’s won’t have the income to fall back on.

Personally, I see nothing wrong with restaurants owning their real estate. In fact, between the real estate, the potential of Qdoba and the current strength of its main brand, I like JACK is one of the better options out there.

The Rest

My final two selections were once related: McDonald’s owned restaurants in Latin America until August 2007, when Woods Staton and investors acquired the business from McDonald’s for $698 million. Arcos Dorados (NYSE:ARCO) is the world’s largest McDonald’s franchisee, and one of the 10 biggest employers in Latin America.

Since raising $1.25 billion in April 2011, Arcos’ stock has lost 16% of its value, though it has posted a 20% gain year-to-date through May 8. ARCO’s problem is twofold: First, its comparable store sales growth in 2012 were single digits (9.2%) for the first time since 2009 — not good when investors are used to double-digit growth. Secondly, the devaluation of the bolivar in Brazil in February hurt earnings, as did increasing food costs.

Moving forward, however, ARCO’s comps will look just fine when compared with its 2012 numbers and not the unsustainable ones from 2010 and 2011. With an enterprise value that’s 10 times EBITDA, ARCO has the biggest growth opportunities of any publicly traded burger business.

As for McDonald’s, whatever growth levers it tweaked back in 2010 have come to a grinding halt. Its comparable-store sales globally have seen declines in the first four months of the year. However, that didn’t stop McD’s from increasing earnings per share by 2% in the first quarter to $1.26 per share. Of that EPS, it paid about 61% to shareholders for dividends.

When I look at this type of capital-intensive business, I want to know how much operating profit it generates from $1 in capital spending. Most are between 50 cents and a buck. McDonald’s, however, generates more than $3 in operating profit per dollar in capital spending. It’s the best in the industry.

McDonald’s will always be attractive to investors because it’s a Dependable Dividend Stock and generates almost $4 billion in free cash flow annually, which guarantees share repurchases as well. Despite its recent woes, you can’t go wrong with the Golden Arches.

Verdict

First off, I just want to add that I would have included Burger King (NYSE:BKW), but Bernardo Hees — the CEO responsible for its turnaround — was promoted by Jorge Paulo Lemann to be the chief executive for Heinz (NYSE:HNZ). Without him, I’m not as confident about its chances.

I recommend all four — McDonald’s for conservative investors, Jack in the Box for those looking for a bit more risk, Arcos Dorados as a play on Latin America and Red Robin Gourmet Burger for something a bit more upscale.

If you only could buy one, I’d have to go with McDonald’s.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/05/4-tasty-ways-to-bite-into-the-burger-business/.

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