The Best Burger (Stocks) in America

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

We Americans just love our burgers. If you want to start a lively argument just opine that such and such makes the best burger. Google "best burger in America" and you get over 35 million results.

Red Robin Gourmet Burgers (NASDAQ: RRGB) and the big three, McDonald's (NYSE: MCD), Wendy's (NASDAQ: WEN) and Burger King Worldwide (NYSE: BKW), are falling over themselves to create the zenith, the pinnacle, the best burger. For only pennies more, independent chains like In-and-Out burger, Shake Shack, and Five Guys are selling better burgers. The independents made the top three in the list of top ten chain burgers according to the Daily Meal's burger experts. None of the publicly traded chains made the cut, but millions eat their burgers every day. What is going on in this cutthroat arena?

The King grins

Burger King Worldwide  was taken public last summer by the same people who took them private in 2010, 3G Special Situations Fund (also the same group that worked with Warren Buffett on Heinz). The fund still owns the lions' share of the stock. The company is shareholder-friendly since going public, announcing a stock buyback of $200 million through 2016 and raising the dividend by 20%.

Burger King is the number two burger chain worldwide behind McDonald's. Burger King operates 11,707 company-owned and franchised restaurants worldwide. It is a faster grower, and its operating margin at 31.95% is better than 30.15% at McDonald's.

Burger King has been upping its burger game with chipotle burgers, turkey burgers, veggie burgers, and  bacon cheddar stuffed burgers. It is making some gastronomic strides, and the stock price appreciation of 27.99% over the last year is proof.

Caveats with Burger King are its 12.70% short interest, its price/book at 5.73, and especially its debt of $3.05 billion to $598 million cash.

The clown frowns

McDonald's stock has underperformed the S&P 500 over the last year, gaining only 11.90%. It offers the largest yield at 3.10%, but the stock hasn't benefited from this last year's search for yield. McDonald's is a Dividend Aristocrat, having raised the dividend for more than 25 consecutive years.

It trades at a higher price/book of 6.58 and, as mentioned before, at a PEG of 2.04 to Burger King's 1.50 it won't grow as fast. Margins have been declining over the last three years in Europe, Asia, and the US as the company scrambles to bring in traffic with promotions and new menu items. On the Q1 earnings call CFO Peter Benson stated they were willing to sacrifice a little margin to win market share.

The company will be reporting Q2 earnings July 22 and will have to better those Q1 earnings of global comps, consolidated revenue, and operating income all down 1%. Diluted EPS was up 2% to $1.26. Analysts will be eager to hear about  the debuts of their egg white omelet, snack wraps featuring steak and chicken, and the Fish McBites.

The Robin is bobbin' along

Red Robin's trailing P/E is a pricey 30.05 with a forward P/E of 21.98. Analysts' growth estimates have come down from 13.77% five year EPS growth rate predicted in April to 9.50%. This has driven up the PEG from a reasonable 1.44 in April to its current 2.71.

The stock has had an amazing run, gaining 78.74% over the last year. With great stock runs comes great short interest increases, now at 13.10%.

The likely catalyst to earnings growth is its downsized concept of its 468 sit-down restaurants, Burger Works. The 5,000 square-foot casual dining restaurants are still their mainstay, but with most of the signature Red Robin menu and alcohol these should prosper as they open at airports, stadiums, malls, college campuses, etc. nationwide. They've rolled out four in Colorado and one at Ohio State University. Red Robin's Burger Works will increasingly challenge the big three as it takes a fast food approach to expansion.

Winning with Wendy's?

Wendy's next big thing is the Pretzel Bacon Cheeseburger among other new menu items like waffle cone frostys. The company has also been experimenting with a Value Menu for the first time.

Wendy's  forward P/E is 25.48 with a yield of 2.70%. Its price/book is the cheapest of these at 1.18 and a PEG of 1.89. The stock has gained 24.16% over the last year yet the short interest at 13.50% is growing.

Wendy's reported Q1 results on May 8 with reiterated guidance on EBITDA and only slightly higher EPS outlook due to refinancing benefits. Operating margin at 7.38% is better than Red Robin's at 4.37% but  worse than Burger King and McDonald's. Slowly growing margin expansion was cited by Wells Fargo in its initiation of coverage in June for only a Market Perform rating, although it noted its EV/EBITDA is better than competitors'.

The stock price is already beyond the median analyst price target of $5.80, and sentiment is neutral to slightly bullish with five-year EPS growth of 14.88% but an astounding 66% over the next year. Granted, 2012 EPS came in at $.02 per share and Wendy's has already earned $0.01 per share in the first quarter, but total revenues have seen a multi-year decline from $3.42 billion in 2010 to $2.51 billion in 2012.

The company is in the midst of major revamping (flat screen TVs, cozier seating, fireplaces) to most of its 6,544 restaurants expected to complete by 2015. Closings during remodeling and expenses may hit the bottom-line until then.

Take a bite of these

McDonald's stock hasn't performed well since 2011. With McDonald's willing to sacrifice margins near-term it may stay weak, although the yield is appetizing.

Red Robin's stock has soared; so despite a promising move into fast food, it should be approached with caution. Burger King with its growth prospects is a possible buy but you've been forewarned about its huge debt.

Wendy's may be a come from behind winner here if one has a much longer term outlook, but ease in on the name on market downturns.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's, and Red Robin Gourmet Burgers. 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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