Will This Industry Continue To Grow?
Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This past spring brought challenges to the restaurant industry. In May, it seems the industry has turned a corner. With sales growth reports coming in for a few companies, there are some great opportunities ahead for investors.
The major player in the industry
When it comes to fast-food restaurants there is no company bigger than McDonald's (NYSE: MCD). This behemoth has nearly 35,000 locations across the world in 119 countries. Last year, it brought it $27.5 billion in revenue.
The stock has gained 9.1% in the last 12 months, but took a short dip at the end of May. One issue that has been on the radar of investors is slower same-store sales growth earlier this year. But, good news just came in - May same-store sales growth was higher than expected.
Sales grew by 2.6% across the company for McDonald's. Some areas reported higher growth than others. Europe grew by 2% and the United States nearly 3%. There was a small amount of bad news for McDonald's; Asia-Pacific rose by just .9%, but did fall in China. This area has been having issues with contaminated chicken This is one small area and isn't a major concern for investors.
The main factor for the growth: new product offerings. The company is focusing on the menu and aggressive marketing - exactly what it should be focusing on. New offerings this summer include egg-white sandwiches, premium chicken wraps, and other value items.
The last five months didn't see much growth, but May brought higher numbers. Investors can expect continued revenue growth of about 4%. The stock price has room to grow thanks to the recent price pullback last month. With new product offerings and aggressive marketing, the stock has the opportunity to grow nearly 8% to $107 per share. McDonald's is an iconic American brand. Sales are improving, so consider this a buy.
Facing challenges but pushing ahead
McDonald's isn't the only company having challenges in China. Yum! Brands (NYSE: YUM) took a major hit in its China operations causing a decline in same-store sales of 36% in the month of April. May saw an improvement with a decline of just 25%.
The decline in China is mainly due to one of Yum! Brands' restaurants - KFC. The bird flu scare in chicken caused sales to plummet. This hasn't stopped Yum! from continuing to expand.
Yum! has a plan to open up more locations in China this year - 700 to be exact. This will bring total locations in China to nearly 5,000. The company is also expanding to Mongolia with 15 stores in the next few years. Mongolia is expected to see major economic growth of 13% per year. This is a fantastic move for the company.
Yum! will be expanding in the United States with its Taco Bell stores. The company has a plan of additional stores, new products, and aggressive marketing to double the division's revenue in the next eight years – music to investors' ears.
A small company with fast growth
Chuy's (NASDAQ: CHUY) is a small, regional Mexican restaurant chain headquartered in Austin, Texas. The company has just 42 stores and a market cap of only $650 million. So it doesn't operate in the same world as McDonald's and Yum!.
The company had its IPO last July and the stock price has risen nearly 170% since. The main factor leading to this awesome stock growth is top-line revenue growth. Chuy's has shown 25% revenue growth in the last year.
Same-store sales aren't very impressive but are still solid at 2.3%. The company has been expanding and will continue to do so. The general consensus on revenue growth for the current year is 18%. The growth may start to taper, but there is still growth in the future.
The stock has already climbed quite a bit. But there is more room for this stock.
The restaurant industry can be a turbulent one. If you are looking for a small company with a lot of room to advance, Chuy's is the one for you. Both McDonald's and Yum! Brands are strong names with a long history of performance. If you own these, keep them, as growth should continue throughout the year. If you want major growth, stick with Chuy's.
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Austin Higgins has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!