These Stocks Look Tasty
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have selected some financial and valuation ratios for five successful quick service restaurant companies: McDonald's (NYSE: MCD), Starbucks (NASDAQ: SBUX), Yum! Brands (NYSE: YUM), Chipotle Mexican Grill (NYSE: CMG) and Panera Bread Company (NASDAQ: PNRA). These companies are not in the same growth stage, but I believe we can make some interesting conclusions from this comparative analysis.
The numbers we are going to analyze are: market capitalization (size), forward P/E Ratio (valuation), PEG ratio (valuation adjusted for growth expectations), earnings growth over the last five years (past growth) and expected growth in earnings per share in the next five years (future growth estimates).
McDonald's looks good from a valuation standpoint, the company trades at the lowest Forward P/E of the group at 15.8; it also has the lowest growth expectations with a 10.4 annual expected earnings growth for the next five years. But the company has what it takes to deliver higher growth numbers.
In fact the company reported an increase of 15% in earnings per share for the last quarter helped by an increase of 7.5% in global comparable store sales. McDonald´s has been able to generate strong returns for investors over the long term through the right product offerings and pricing strategies, and looks well positioned to continue in that way. The company pays a 2.8% dividend yield and has a solid track record of dividend increases and share buybacks to increase shareholder´s returns.
Yum Brands owns KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W All-American Food which make an interesting brand portfolio. The company reported earnings on Monday after the close, and the numbers were quite strong due to the company´s performance in China. Yum reported a 30% increase in fourth quarter earnings generated by an outstanding growth of 21% in China´s same-store sales.
Yum pays a modest 1.8% dividend yield and the stock is not too cheap trading at a Forward P/E of 19, but the company is growing nicely, and they are doing a very good job in a huge market like China, so growth prospects look good.
Investors looking for growth should consider Starbucks like an interesting possibility. The company trades at a Forward P/E of 21.4 which is higher than valuation ratios for McDonald´s and Yum Brands, but Starbucks also has stronger growth prospects. Analysts are expecting an 18% annual growth in earnings per share for the next five years and when we consider these growth expectations the company doesn´t look so expensive trading at a Price to Earnings Growth (PEG) ratio of 1.6 which is the lowest of the five companies compared.
The company reported a 9% increase in sales at stores opened for at least 13 months for the last quarter, which shows a solid operating performance. Starbucks has recently announced expansion plans into India where it hopes to replicate the success it´s having in countries like China. Emerging markets are still underpenetrated for this company and they offer many exciting growth opportunity for the long term. Starbucks pays a 1.4% dividend yield.
Chipotle Mexican Grill and Panera Bread are the two high growth companies of the group, they have been very successful over the last years and still have many growth opportunities with an almost 23.5% and a 18% expected growth in earnings per share over the middle term respectively. But they look too expensive even when factoring in these growth expectations with PEG ratios of 2.3 for Chipotle and 1.9 for Panera.
These stocks don´t pay any dividends, which is typical of companies in their high growth stage and they still have many untapped opportunities. Geographical expansion has barely started for Chipotle and Panera, so they are still in their early growth stages.
However, Starbucks and Yum have already showed their potential for growth in emerging markets and they both look like a better proposition from a valuation standpoint.
Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, Panera Bread, Starbucks and Yum! Brands. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, Starbucks and Yum! Brands. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.