Two fast-food behemoths, YUM Brands (YUM) and McDonald’s (MCD), have suffered a few hits over the past few quarters.
Both sides have suffered image-related problems, such as Yum’s issues with a bird flu scare in China. However, the big overarching issue is that both YUM and MCD are losing sizable slices of the market to smaller and more agile rivals.
Reuters’ SSS restaurant indicator suggests that the restaurant business sector will continue to grow in the first quarter — a tide that could lift all boats.
But with both of these behemoths showing signs of struggle, maybe it’d be best to just own one of these boats right now.
But which? YUM stock or MCD stock?
Yum Brands: The Spicier Choice? (YUM)
As any food connoisseur will tell you, it’s all a matter of taste.
At least in 2015, investors obviously prefer YUM stock, which is up 23% year-to-date despite its troubles, vs. a slightly Street-beating (but still modest) 2%.
YUM does have the upper hand in diversity, boasting well-known brands Pizza Hut, KFC and Taco Bell. Yum Brands has been especially dominant in China, and enjoyed quick penetration into India.
In a highly competitive field, Yum’s Pizza Hut brand has gone to the dogs with some questionable moves. The latest is the newest addition to the Pizza Hut menu — a pizza with a hot dog-embedded crust. Pizza Hut labels the creation a “game changer,” but some view it as a desperate attempt to revive consumer interest.
If the poor reviews are any indication, it doesn’t seem to be working.
Aside from the hot dog misstep, Yum does seem to understand how consumers’ tastes are changing toward fresher, high-quality food. Pizza Hut’s overall menu has been bolstered with a number of not-your-average offerings, including things like sriracha-honey crusts; Taco Bell has tapped into the Cantina lineup; and KFC has slowly shifted toward more grilled options over its traditional fried.
This “spicier” Yum Brands is what has appealed to investors. The only question is whether the preference for YUM stock can last.
McDonald’s Newest Additions (MCD)
McDonald’s has been around too long to just roll over and give up.
Management recognizes that investors haven’t been excited about MCD stock for a long time. Investors also seem to be disappointed in what appears to be just Band-Aid changes from new CEO Steve Easterbrook.
McDonald’s doesn’t need a bandage — it needs a tourniquet.
Maybe they’ll be getting one soon enough.
McDonald’s recently appointed Robert Gibbs as MCD’s newest VP and global chief communications officer. Gibbs, who previously worked under President Barack Obama as a press secretary, will be tasked in reorganizing McDonald’s corporation communications. MCD’s second appointment — Silvia Lagnado was hired as MCD’s global chief marketing officer — is even more noteworthy. An ex-CMO of spirits company Bacardi Limited, Lagnado will play a key role in revamping the McDonald’s brand.
Together, Gibbs and Lagnado will work toward making MCD stock vibrant again, and given their pedigrees, they stand a good chance of success.
While investors’ enthusiasm has been muted, this is a big deal. Prior to their appointments, those positions were generally filled by McDonald’s veterans who came up through the ranks, so the fresh perspective of Gibbs and Lagnado should be seen as a major shift in McDonald’s inner workings.
Under the Hood
When we compare the numbers of YUM and MCD stock, McDonald’s seems to have some important advantages.
For one, MCD’s operating margin of 28% is almost twice that of YUM’s 15%. Return on assets of 13.4% is more than a percentage point higher than Yum Brands, too. McDonald’s also wins out on the dividend front, at 3.5% vs. just 1.8%.
Finally, we have an indicator to guide us which many in the industry use: average unit volume (AUV), which measures average operating sales per branch.
MCD’s average is $2.5 million per annum vs YUM’s average of $1.2 million in KFC, $800,000 in Pizza Hut, $1.4 million in Taco Bell and $1.6 million in its China segment, PH China.
The Bottom Line
While both McDonald’s and Yum Brands have their issues, MCD stock seems to come out on top.
McDonald’s and its new CEO are finally on the ball and are taking action to revamp the brand. Plus, as shown above, MCD looks stronger from a financial standpoint.
Sure, YUM stock clearly has momentum on its side, but shares’ heavy gains have also inflated its value — it currently trades at 40 times trailing earnings vs. McDonald’s 21, and even on a forward basis, MCD stock’s 18 is cheaper than YUM’s 22.
At the end of the day, you have to ask yourself: Would you prefer to own a holdings company with a mix of brands with thinner margins, and own it at a premium … or a company with healthy margins that’s still trading at a much fairer price and offers you plenty of income to wait for a rebound?
The answer seems clear to me. Buy MCD.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
