When investing in restaurant stocks, it’s important to remember that, on average, less expensive fast-food restaurants get a boost when the economy dips and pricier “casual dining” restaurant stocks do better when consumer spending is strong. This is a simple investing strategy, since it’s logical that eating out for many families moves from fine dining to more economic options.
A review of restaurant stocks shows that, on average, fast-food, restaurant and “to-go” chains such as McDonald’s (NYSE: MCD), Starbucks (NASDAQ: SBUX), Taco Bell (NYSE: YUM) and Red Lobster (NYSE: DRI) are mostly riding high above the current Dow and S&P 500 comparisons. Despite this slight overall decline on Wall Street, some of these chains are doing surprisingly well. At the same time, fast-food competitors Wendy’s/Arby’s (NYSE: WEN) and Burger King (NYSE: BKC) are far below the market average, which while a temporary challenge for the companies themselves, does present some very intriguing and opportune buying opportunities.
Here are six major fast-food companies and their current average price targets. All have strong upward potential, according to estimates by Thomson/First Call. They are as follows:
McDonald’s (MCD): Started by the McDonald brothers in 1940 San Bernardino, Calif., the now dominant McDonald’s is the world’s largest chain of hamburger fast food restaurants. There are some 31,000 McDonald’s restaurants in 119 countries and territories worldwide, serving 47 million customers each day and employing more than 1.5 million people. With such staying power, the company has increased shareholder dividends for 25 consecutive years, making it one of the S&P 500 Dividend Aristocrats. Wall Street notes an average price target $79, according to Thomson/First Call, some +13% above the current pricing of about $70 a share. McDonald’s is up +13.5% year-to-date, far above the -1.8% return for the Dow and -2.8% lost by the S&P 500 index.
Starbucks (SBUX): An international coffee and coffeehouse chain – either loved or hated, depending on the number in your city – Starbucks is the largest coffee company in the world, with 17,133 stores in 49 countries. Based in Seattle, Starbucks sells coffee and espresso-based drinks but has recently been expanding its menu to other fare and looking to broaden its appeal with its lower-priced Seattle’s Best brand. Wall Street notes an average price target of $30 per share – a full +20% above current pricing. SBUX has also seen an increase in sales in the first half of 2010, hinting gains will continue. SBUX has added +11.5% year-to-date, compared to the -1.8% for the Dow and -2.2% for Nasdaq.
Wendy’s/Arby’s (WEN): Wendy’s, an international fast food chain restaurant founded by Dave Thomas in 1969 Columbus, Ohio, ranks third in the world’s fast food chain fight with its 6,650 locations lagging only McDonald’s and Burger King. Not content to stay No. 3, the company has scrambled for all sorts of promotions including the recent late night snacks push and creation of a breakfast menu in 2007 that was largely unsuccessful. WEN is listed by Thomson/First Call as a having an average price target of about $24 – a massive +500% above the current pricing of $4, making it a strong buying opportunity. True, only four brokers were polled for that consensus target, but the upside is dramatic if they are correct. The stock has, for the most part, followed the Dow and S&P, though has taken a dip in the last few months. At -10.8% year-to-date, it rests below the current market losses.
Yum! Brands (YUM): Encompassing KFC, Taco Bell, Pizza Hut, Long John Silver’s and A&W restaurants worldwide, Yum! Brands was created in 1997 as a spin-off from PepsiCo (NYSE: PEP). The conglomerate had owned and franchised the KFC, Pizza Hut and Taco Bell brands. Based in Louisville, Ky., it is the world’s largest fast-food restaurant company regarding system units — more than 36,000 restaurants in more than 110 countries and territories under its sundry brands. YUM has an average price target of $46, according to Thomson/First Call. That’s +15% above current pricing of about $40 for YUM stock. It’s faring remarkable well at +15.6% year-to-date, compared to the -1.8% for the Dow and -2.8% lost by the S&P 500.
Darden (DRI): Another multi-brand restaurant operator, Darden is headquartered in Orlando, Fla., and licenses Olive Garden, LongHorn Steakhouse and Red Lobster. Darden owns and operates more than 1,700 restaurant locations throughout North America and has more than 157,000 employees. Darden does not franchise its restaurants in the United States, but many of its international locations are not under corporate control. As of 2008, the Company operated over 1,700 restaurants in the United States and Canada. Wall Street notes an average price target of about $51 a share, according to Thomson/First Call, nearly +30% over current share valuation for the stock. DRI is up an impressive +16.3% year-to-date, compared to the -1.8% for the Dow and -2.8% lost by the S&P
Burger King (BKC): Burger King has more than 12,000 outlets in 73 countries; 90% of which are privately owned and operated. BKC has over 37,000 employees who serve 11.4 million customers daily. Curiously, Burger King has a long relationship with the U.S. Army and U.S. Air Force installations across the globe, under a previous contract established in the 1980s. In 2008, Fortune ranked BKC among America’s 1,000 largest corporations and S&P included shares of Burger King Holdings, Inc. in the S&P MidCap 400 index. According to Thomson/First Call, BKC has an average Wall Street price target of about $2, a solid +37% over current valuations for the stock. BKC stock is down -10.5% year-to-date, a drop below the -1.8% for the Dow and -2.8% lost by the S&P.
As of this writing, Burke Speaker did not own a position in any of the stocks named here.
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