Which Quick Service Restaurants Is a Good Buy Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

McDonald’s (NYSE: MCD) recently experienced a 2.7% drop to around $97.60 per share. The recent drop was due to the sluggish second quarter earnings results, which missed analysts’ expectations. Famous investors including Jim Chanos, Jim Simons and Ken Fisher have McDonald’s in their investment portfolios. Let’s dig deeper to see whether or not we should be bullish about McDonald’s now.

Second quarter earnings results, which missed estimates

In the second quarter, McDonald’s managed to increase its revenue by 2.4% to nearly $7.1 billion while the net income came in at around $1.4 billion, or $1.38 per share, 4% higher than the net income of $1.35 billion, or $1.32 per share, in the second quarter last year. The EPS fell short of analysts’ estimates of $1.40 per share. The global comparable sales rose by around 1%.

The company reported that the 1% growth in second quarter comparable sales in the U.S. was due to the introduction of its four key growth categories including beef, chicken, beverages and breakfast, the support for the Dollar Menu and the company’s classic core favorites.

McDonald’s experienced a decline in comparable sales in Europe and emerging markets including Asia/Pacific, Middle East and Africa (APMEA). Don Thompson, the company’s President and CEO remained bullish about McDonald’s future despite the sluggish outlook till the end of the year. He said: “I am confident that our System, global infrastructure and the unique and evolving McDonald's brand experience will enable us to deliver sustained profitable growth for the long-term.”

What attracts long-term investors is the consistent cash return to its shareholders. In the second quarter, McDonald’s reported that it had returned $1.2 billion via both dividends and share repurchases. McDonald’s has expanded its business footprint in new emerging and promising markets.

Recently, McDonald’s has announced the developmental licensee for Vietnam market. Vietnam is a favorable market with attractive demographics for consumer good global giants with a population of nearly 90 million. The first restaurant in Vietnam will be opened at the beginning of next year.

At $97.60 per share, McDonald’s is worth around $97.80 billion. The market values McDonald’s at 11.3 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). The dividend yield is around 3.10% at its current price.

The lowest valuation with the highest dividend yield

Interestingly, compared to much smaller peers including Burger King Worldwide (NYSE: BKW) and Yum! Brands (NYSE: YUM), McDonald’s is the cheapest business among the three.

Burger King Worldwide is the most expensive company. It is trading at $19.50 per share, with the total market cap of more than $6.8 billion. The market values Burger King at 14.45 times its trailing EBITDA. In the first quarter, Burger King grew its EPS by 49% and its adjusted EBITDA by 5%. However, the company’s system-wide comparable sales dropped by 1.4%.

The company has laid out its detailed plan for different regions in the future. In the U.S. and Canada, it has a Four Pillar plan including Menu, Marketing, Image and Operations to raise the average unit sales. In the international markets, it will accelerate its growth via Master Franchise JVs and Development Agreements, expanding its footprint in the emerging middle class consumer spending.

The company has returned cash to investors via both dividends and share repurchases. At the current price, Burger King yields around 1.23%. The company also announced a $200 million share repurchase program, which is available for use until May 2016. $200 million could yield an additional 2.94%.

Yum! Brands also has a higher valuation. At $71.50 per share, Yum! Brands is worth around $31.90 billion on the market. It is valued at 12.70 times its trailing EBITDA.

Yum! Brands focuses its operations mainly in China. Year-to-date, around $2.6 billion was generated in China, accounting for nearly 47.8% of the total revenue, while the U.S. ranked second with $1.4 billion in sales.

In the second quarter, its worldwide system sales increased by 1%. The company was adversely affected by the sluggish performance in China, with a 20% decline in same store sales. The sluggish operating performance in China was caused by the negative publicity of the avian flu and the poultry supply incident.

For the full year, Yum! Brands expects a mid-single digit EPS decline compared to the previous year. The company felt bullish about the China operations, estimating that its same-store sales in China will recover within the year.

China, with the largest population in the world, remains the most attractive market for consumer goods businesses in the world. The significant exposure of Yum! Brands to the large and growing Chinese consumer market will definitely benefit the company in the long run. At the current price, Yum! Brands offers investors a 1.90% dividend yield.

My Foolish take

Among the three companies, I like McDonald’s and Yum! Brands. McDonald’s owns a global network of local family restaurants while Yum! Brands has significant exposures to the Chinese consumer market. Indeed, both of these companies, with their global footprints, will deliver decent returns for patient shareholders in the long run.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and 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!

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