Fast Food Wars

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

McDonald’s Corp (NYSE: MCD) is the second worst performer in the Dow this year only outperforming Hewlett-Packard. Does McDonald’s really deserve to be linked with a laggard like this? I think not.

Is McDonald’s just suffering from the new CEO curse as is Hewlett-Packard (which has a lot more fundamental problems than McDonald’s)?

On September 24 McDonald’s raised its dividend by 10% for a payout of $3.08 annually taking its yield to 3%. Since Jim Skinner left as CEO the stock had pulled down to the mid-$80’s and is still only up 4.42% over 52 weeks seriously underperforming the S&P 500.

Just last week Marketforce published survey results of best quick-serve restaurant burgers rated for taste finding people think the burgers at Five Guys are the best with In-And-Out burger (a western chain that my daughter stops at from the airport on every trip to California) as number two. McDonald’s didn't even make the top ten.

Forbes made the argument for McDonald’s that it has brand loyalty and a dollar menu that appeals to all demographics. Faint praise. They could have mentioned all the other things McDonald’s has going for it; the new smoothies debuted this summer, the popular McCafe drinks, the breakfast menu, the expansion of chicken menu items and all the healthy alternatives that it has been rolling out the last few years and 33,510 locations worldwide.

McDonald’s is probably the most efficiently run fast food chain in the world with a standardization of effort that car manufacturers envy. But the quarterly earnings growth is -4.50%, a little distressing from this burger behemoth and quarterly revenue growth at .20% is not much better. Commodity costs and value menu wars have hung heavy on McDonald’s.

What I think is most promising is the news that they will be aggressively wooing the Indian market. Already, vegetarian alternatives are available throughout their Indian restaurants with no beef or pork items available.  The emphasis is on chicken and vegetarian dishes like a potato based curried patty. It actually sounds pretty delicious. This should help offset any revenue declines from Europe or same store sales slump in the US. The market in India is huge and McDonald’s needs to do well there as competitor Yum! Brands Inc (NYSE: YUM) has had tremendous success in China.

Pundits have attributed Kentucky Fried Chicken’s success in China partially to the Col. Harlan Sanders logo as an attractive symbol to a culture that reveres its elders. (Tongue in cheek alert) Maybe Ronald McDonald should go gray and wrinkle up a bit.

All joking aside Yum! has outperformed McDonald’s this year up 26.92% over 52 weeks. Yum! owns Taco Bell, Pizza Hut and Kentucky Fried Chicken. Yum has a P/E of 20.90 and a forward P/E of 17.84. The yield is 1.70% and they just raised it by 18% the same day as McDonald’s did.

What about McDonald’s other main competitor, Burger King Worldwide, Inc (NYSE: BKW)? It owns and operates 818 restaurants and franchises another 11,786 worldwide. Aside from its on-again, off-again showings on Wall Street, having ended public trading in 2010 only to re-IPO in mid-June 2012, the newly trading stock has a -966.00 P/E (and people complain about Amazon’s P/E). Yikes! UBS and Barclays both initiated coverage in the last 6 weeks. UBS rated it a neutral and Barclays an equal weight which are not exactly ringing endorsements. Even dismissing the convoluted machinations of a private acquisition company reverse merger that allowed it to debut again after it slunk from the public arena in 2010 and even overlooking that P/E it is still number 2 in the burger biz. If McDonald’s is hurting then Burger King is on the floor half dead. Not a pretty metaphor but you get the picture.

Yum is reporting again on October 9 and the market will be listening closely for tells on the health of China.  Analysts consider this a growth name with 17% EPS growth predicted because of its China exposure and plans for expansion in India and Africa. They also like its dividend growth. Yum! has only been paying a dividend for eight years, but it has doubled in that time.

What happens when McDonald’s and Yum! go head to head in China and India? Yum!’s growth has mainly come from China which accounts for close to half their revenues. With slowing same store sales in the US, value menu wars, and constant giveaways (free small coffees this week) it looks like McDonald’s absolutely has to get a significant footprint in China and India.

Which has more upside-Yum! or McDonald’s? At this point it seems to depend on your opinion on economic conditions in China. If you think China’s good then maybe McDonald’s can localize their fare to Chinese tastes as they have in India. Maybe the big money in McDonald’s was made in that 2010-2011 move but as a very long term hold I think McDonald’s is a good name. Its 3% yield might sound good to a portfolio hungering for dividends.

Yum! is already there in China, already proven. I‘m leaning toward Yum! as a fast food name. I only wish they would sell off Pizza Hut. As for Burger King it’s a day traders dream, short, long.. it’s almost as speculative as a biotech. If you are an investor and not a trader pick up one of the big boys, instead.

leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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