The Burger Wars and Who's Winning

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 (NYSE: MCD), the world's largest fast food chain, is fighting on several fronts from casual dining restaurant chains and private burger up-and-comers to its usual rivals in the burger biz as the line blurs between the quick serve and fast casual concepts.

A battle for market share

McDonald's just reported Q1 earnings on April 19. Analyst Michael Kelter of Goldman Sachs mentioned the elephant in the room: "So, your restaurant level margins now appear to be on pace for their third straight year of declines in all three divisions; in the U.S, in Europe, and in Asia." In answer to Kelter's question how they plan to change that, CFO Peter Benson stated they were willing to sacrifice a little margin to win what he called, "a battle for market share." 

They may just need an elephant gun to slay that declining margin rogue elephant and keep poachers away from their burger turf. Q1 earnings weren't much to write home about with global comps and consolidated revenue and operating income all down 1%. Diluted EPS was up 2% to $1.26. The stock itself is barely up 5% over the last year.

The company did announce the debut of their egg white omelet on April 22 and the snack wraps featuring steak and chicken as well as the Fish McBites. As CEO Don Thompson said, it's the new menu items and the larger sandwiches that are key.

Although the value menu disappointed, McDonald's itself is still quite a value. Its yield is at 3.10% and the P/E is at 18.53. The PEG reflects the slowing growth nonetheless at 2.02. Operating margins are still much high (even if declining) at McDonald's. Don't forget McDonald's is also a Dividend Aristocrat, having raised the dividend for more than 25 consecutive years.

Throwing down the gauntlet

A company that has thrown down the gauntlet, if not outright slapping McDonald's in the face, is Red Robin Gourmet Burgers (NASDAQ: RRGB), which has a downsized concept of its 468 sit down restaurants, Burger Works, a food court or airport size fast food counter. The 5,000 square-foot-plus casual dining restaurants are still their mainstay but with beer and wine available and most of the signature Red Robin menu these could really gain traction as the company rolls them out to airports, stadiums, malls, college campuses, etc. nationwide.  They've rolled out four in Colorado and one at the Ohio State University campus. Shades of Buffalo Wild Wings' strategy!

The prices compare favorably with the more expensive McDonald's burgers. McDonald's features the Cheddar Onion Burger on its dollar menu but comparing that to a Burger Works make your own burger is like comparing the cheapest taco on the Taco Bell menu to a Chipotle Mexican Grill hand made burrito with all the fixings. And it seems people are beginning to spend a little more to get better quality if the consistently rising revenues from Panera Bread are any indication.

Red Robin reports earnings on May 13.

Red Robin's P/E is a pricier (like its burgers) 23.20 but the PEG is lower at 1.44. The forward P/E also comes down to 17.77. Naturally, Red Robin has more direct rivals like Applebee's and privately owned gourmet burger joints. Analysts expect 13.50% EPS growth next year and 13.77% five year EPS growth for Red Robin. The stock is up 29.27% over the last year.

The aforementioned Buffalo Wild Wings (NASDAQ: BWLD), the beer, wings, and sports themed chain, has also been offering burgers as a way to hedge previously high chicken wing commodity costs and attract customers. I've liked Buffalo Wild Wings but at a 30.26 P/E and at 52-week highs after March Madness, now is not the time to buy in. It has good corporate governance, reasonably paced expansion plans, PEG at 1.33, and a great CEO in Sally Smith. Still, the stock tends to droop in the summer heat and there will be sales on the shares.

The King storms the castle

Burger King Worldwide (NYSE: BKW) which was brought public (again) last summer, is the second largest fast food hamburger chain globally. The stock is up close to 40% since its September low at $13.00.

Its P/E is supersized at 55.42 but it has a yield of 1.30% (at a sustainable 12% payout ratio) and the lowest PEG of these at 1.28. Burger King operates 11,707 company owned and franchised restaurants worldwide. While it may be a faster grower its operating margin is 26.69%, compared to 30.21% at McDonald's. Its short interest is Whopper sized at 14%.

Burger King announced a stock buyback of $200 million through 2016 and raised the dividend by 20%.

Burger King has been challenging McDonald's with their own version of gourmet burgers: chipotle burgers, turkey burgers, veggie burgers, and the bacon cheddar stuffed burger (you can order it with bacon and cheddar loaded tater tots as your side...mmm bacon). It's also offering the Whopper Jr. for $1.29.

Something to remember is that 3G Special Situations Fund, which took Burger King private in 2010 and then public last summer, still owns the lions' share of stock. They have appointed Burger King's CEO Bernardo Hees to head Heinz as part of the deal 3G has with Berkshire Hathaway on their Heinz deal together. Daniel Schwarz will become new Burger King CEO.

Burger King reports on April 26.

Winning the battle or the war

McDonald's is still the multinational behemoth, a mature grower with a good yield, a Dividend Aristocrat no less, and boasts over 100 billion served (as of 1993) and a $100 billion market cap.

Burger King has kept up with McDonald's every move since going public, however. Not only that, the share repurchase and dividend increase should attract value investors.

Red Robin's Burger Works will increasingly challenge McDonald's (Burger King as well) as it takes a fast food approach to expansion. Its Burger Works may be a small fry now but watch out, Mickey D.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Burger King Worldwide, McDonald's, and Red Robin Gourmet Burgers. The Motley Fool owns shares of Buffalo Wild Wings 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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