Full Circle on Fast Food

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

The very first stock I ever blogged about was McDonald's ) and it's time to revisit it before earnings on January 22. McDonald's was a dog in 2012. No two ways about it. It was the stellar performer in 2011 and then CEO Jim Skinner retired and worldwide revenues slowed for the first time since 2003.

Despite worldwide brand awareness McDonald's still has competitors enjoying more bullish sentiment like Burger King Worldwide ) hitting a 52 week high on January 15, Wendy's (NASDAQ: WEN), and Sonic Corp ).

The Dogs of the Dow theory says that McDonald's should rise this year, but it was downgraded on January 9 by a Raymond James analyst in anticipation of a decline in US profit due to payroll tax increases and the aforesaid competition. Can McDonald's bring back its mojo? (There really ought to be a Mojoburger, sounds cool, doesn't it?)

A game of chicken?

McDonald's has been introducing new items like the much heralded Mighty Wings (Buffalo wings), successful in its test in Atlanta and now hitting the Windy City for a trial at 500 locations. Some analysts believe this is misguided as wings are too messy to eat in a car. Of course, so is the McRib but they bring that back every year. Analysts are also concerned about commodity costs as wing parts are now more expensive than chicken breasts.

Burger King is coming out with new items like an avocado swiss burger featuring avocado aioli. They're also debuting a Philly cheesesteak style chicken sandwich and an Italian meatball style chicken sandwich. Further fueling the chicken fires Burger King has tempura battered chicken nuggets.

Wendy's has joined the fray by taking their chicken options to its value menu with three chicken wraps and a chicken sandwich. As an aside it was Wendy's Dave Thomas who first offered a value menu in 1989, 24 years ago. Wendy's is making an end run around McDonald's by offering many more options (and healthier) on its value menu than competitors.

Sonic offers chicken, too, but it's not really a driver of traffic. What's new at Sonic are the breakfast sandwiches and specialty grilled cheese sandwiches. Since the dairy cliff went away grilled cheese may have been a profitable choice.

Fast food internationale

McDonald's move into China has been widely reported, but Burger King plans for 1,000 locations in China over the next few years as well as expanding in Russia and Central America. Counterstroke is McDonald's expanding in Italy and impressing actual French chefs with its McBaguette sandwich.

McDonald's hasn't had the success in China that Yum! Brands has enjoyed with its KFC restaurants. And with McDonald's moving more chicken items that may place them too directly in the KFC wheelhouse.

Wendy's operates in 27 foreign countries, but Sonic operates solely in the US.

 Fast food fundies

Back and forth it goes but the fundamentals are that Burger King is still a turnaround story that hasn't yet proved itself with negative earnings of $0.02 a share, although it's making some good moves like selling off the company-owned locations to franchisees this last year. It only returned to the public markets last spring, but becoming a franchise corporation creates a lovely royalty stream like Jack In The Box enjoys and cuts down on a great many headaches.

Wendy's is getting interesting after having reported on January 16 better than expected Q4 earnings of $0.08 per share twice what was expected. The company also guided higher than expected for FY2013 for between $350 and $360 million in adjusted EBITDA. The share price rose almost 5% in pre-market trading on the news. It pays a $0.16 annual dividend for a yield of 3.30%.

Sonic may be the dark horse in this race as it has plenty of room in the US for expansion, and customer loyalty is very strong for the drive-in chain. (Note: when my children were small we lived close to a Sonic and even now my youngest fondly remembers their milkshakes and the older one still begs to stop by the Sonic nearest her campus on the drive home as there isn't one within 50 miles of us). It has a 17.85 P/E and a return on equity of 76.86%. The stock is up 63.24% over the last year.

Sonic reported Q1 net income on January 3 that was up 22% from the year ago period and an 80 basis point improvement in drive-in margins. They also bought back 3% of their stock. The PEG is 1.12. Sonic has had a huge entry into national advertising this last year and plans to continue using free cash flow for national ads on cable. It has 3500 locations and serves six million customers a day.

Of course, that's nothing to McDonald's which has 34,000 restaurants in 120 countries. It has a competitive P/E to Sonic at 17.23, but a higher PEG of 2.01. Its return on equity is 40.01 and it has a five year average dividend yield of 3.10% for a current yield of 3.40%. The company is a dividend aristocrat with dividends paid and raised consistently for more than 25 years. Analysts only expect high single digit growth for McDonald's over the next five years.

Why Go? Why Buy?

The big question is why do people really go to McDonald's. Is it for a new taste experience? Or is it to eat something that is reliably a Big Mac anywhere you go? The French Chef Pierre Koffman who was delighted with his McBaguette in Paris summed it up in the Bloomberg interview," If I come to McDonald’s, I know what I will get, I will have it today, tomorrow and the day after tomorrow, I’ll have the same."

The thesis is still intact that McDonald's is a global brand that will grow (though maybe not at the sizzling pace of a few years ago) and will still raise that dividend, expand into new areas, and offer new tastes. That said, Sonic with accelerating growth, share buybacks, and raised guidance is a name for short termers who might want a little more mojo sauce.

leglamp 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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