by Will Ashworth | July 25, 2013 9:00 am
McDonald’s (MCD) reported second-quarter earnings Monday that left investors hungry for more. The company missed analyst expectations by two cents and faces further challenges ahead, making the future of the one-time fast food king now seem less certain.
That raises an obvious question: If McDonald’s is no longer the fast food stock of choice, what company is? Let’s take a look.
Wendy’s (WEN) was much better off than the golden arches in terms of second-quarter earnings. The stock gained 8% on Tuesday thanks to a two-cent beat and the announcement it is selling 425 company-owned restaurants.
While that’s a promising sign and should boost profits, I don’t think the company has fully turned the corner and remain hesitant to own its stock at this time — especially since it appears that Wendy’s is already fairly valued.
Next up: Burger King (BKW). When Bernardo Hees left the chain to head up Heinz (HNZ) for Warren Buffett and 3G Capital, I assumed that America’s No. 2 burger chain would break its stride. Boy was I wrong.
Zacks Investment Research just upgraded the company to “Strong Buy,” pointing to the fact that former CFO and now-CEO Daniel Schwartz has made impressive changes internationally that should spur growth for some time to come. For the cherry on top, Burger King looks to be a 100% franchised model by the end of this year. This is one burger brand worth considering.
Although we rarely think of Starbucks (SBUX) when it comes to fast food, the iconic brand is moving towards providing a larger food experience in stores to go along with the main event: its beverages. Last year, it acquired San Francisco-based La Boulange Cafe & Bakery for $100 million. While early indications suggest the integration — including new food items that rolled out recently — hasn’t gone as smooth as the company probably would have liked, Starbucks can adapt. I expect the company continue to perform at a high level throughout this transition.
Going back to more traditional fast food stops, we have to give Yum Brands (YUM) a chance. Its trio of brands are all in the top 10 of QSR Magazine’s annual ranking of the 50 biggest quick-service and fast-casual restaurant brands. In recent years, though, the company’s put greater emphasis on its expansion into China at the expense of its U.S. operations. More than halfway through 2013, it looks like that was mistake. China’s growth is starting to slow, while Yum’s U.S. operations are badly in need of an overhaul. I wouldn’t bite into the stock at the moment.
Beyond that, Advertising Age ran a great article in March discussing how McDonald’s has lost favor with the millennial crowd, an influential group of 59 million Americans. Although some think the issue was overblown, data shows that millennials are fleeing hamburger joints — a 16% decline in traffic has taken place over the last five years — and opting for restaurant chains with higher quality food and lots of choice.
Chipotle (CMG), Panera Bread (PNRA) and Noodles & Company (NDLS) are three stops — fast casual ones, if not truly fast food — benefiting from this change in food preferences.
Of the three, I would immediately reject Panera. I recently went for dinner and spent $38 for two sandwiches, two brownies, two small bags of chips and two specialty soda’s costing $4.89 each. The same soda in the supermarket costs around $1.50. Eventually consumers will go elsewhere.
With that in mind, the serious contenders seem to be Chipotle, Noodles & Company and Burger King. You aren’t going to get any screaming buys in the fast food sector these days, but these are all good options.
As I stated previously, Burger King’s doing a great job growing its business on a profitable basis. And Noodles & Company is already a stock market darling, up 140% from its IPO offer price in late June. With several former executives from Chipotle, Noodles has the food to attract millennials and the blueprint to win over America’s stomachs.
As for Chipotle, I recently wrote about some of the reasons why I like it over Yum Brands. Although David Einhorn is short, I believe Chipotle will do just fine in the long run. Plus, its ShopHouse Southeast Asian Kitchen concept is slowly rolling out across the country and could be the next big thing for founder Steve Ells and the rest of his team.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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