These Food Stocks are a Win-Win
Madhu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I always look forward to investing in food companies, and I consider them a super safe investment. The ever growing food demand creates a consistent cash flow generation in food-related companies. Consequently, investors can always feel assured by a regular flow of dividend. Also, these companies are usually free from the risks associated with the launch of new technologies. Scouring the investment landscape, I have selected three food companies that can be considered for long-term gains. These companies have their long term fundamentals intact and a solid business model, which strengthens my confidence in these stocks. Let’s analyze them in detail.
Brinker International, Inc.
Brinker International last month reported its second quarter results for fiscal year 2013. It was the eighth successive quarter in which the company has posted positive numbers in its results. In spite of the reduced traffic this quarter, Brinker reported a 1.1% increase in its sales, which were boosted up by higher menu prices. The earning for the quarter were up by around 6.4% year-on-year mainly driven by the high margins.
Moving forward in 2013, Brinker is betting big on its Chili's business, which has been growing rapidly. In the recent quarter, Chili's reported SSS (same-store-sales) of around 1% despite a decrease of 1.9% in the traffic. By the end of this quarter, the company's Chili's restaurants have been equipped with updated kitchen technology and POS systems. This was part of the company's $100 million investment that began in 2010. Via this technology, the company will be able to reduce the time gap between orders received and orders served, thus enhancing the flow of traffic in the Chili restaurants. These upgrades will be completed in all the restaurants by March, 2013. I feel this investment will immediately start paying off in 2013, providing more competitive advantage to Brinker. This upgrade will also generate cost savings for the company, resulting from higher efficiency in its restaurants.
Along with this, the company recently announced its plans to serve pizza in all its Chili's restaurants. The new pizza platform, backed up by technological upgrades, will further help the company to boost its traffic and sales growth in 2013. I also expect a margin improvement of 100 bps, which will enhance the EPS in 2013.
The established versus the modern
McDonald's (NYSE: MCD) recently reported its January data about its SSS. It posted an increase of 0.9% in the US against the consensus estimate of -0.3%. The SSS in Europe and APMEA were slightly disappointing at -2.1% and -9.5%, respectively. The APMEA results were disappointing mainly due to the huge decline of -17.0% in Japan. Even though the overall international results were not satisfactory, the three continuous months of positive SSS in the US are a promising sign for the company. The company is facing stiff competition from players like Burger King, Taco Bell, and Wendy's, which recently revamped their menus to push sales. However, despite these challenges, the company's global comp sales increased by about 3.1% in 2012, mainly driven by the US, which was up by around 3.3%.
McDonald's is back on track in the US market, which will pave the way for its future growth. In 2012, the company refined its Dollar Menu with more focus on the expensive items. That strategy somehow didn't work for the company, what with customers being extremely price conscious. Therefore, McDonald's will again target the Dollar Menu with revised strategies and promotions for a better sales performance in this year. It included new sandwiches and snacks in its menu and various $1 items such as the grilled onion cheddar burger and fish McBites. I feel that in the short run, the company will face certain headwinds in Asia and Europe. However, by the end of 2013 its earnings growth will be driven by its performance in the US.
While McDonald's is moaning over its falling sales, a company like Panera Bread (NASDAQ: PNRA) has positioned itself as a popular name in the industry even without a dollar menu. Panera's net income increased by approximately 33% year-over-year in the fourth quarter of 2012, going up to $51.6 million. This was supported by the company's operating margins, which increased by around 200 bps to 14.6%. The company has a sound portfolio of products, with its sandwiches segment witnessing a growth of around 34% in the last quarter. Panera will be launching new pasta dishes towards the end of the first quarter of 2013, which can act as a positive catalyst for its lunch and dinner sales.
Moving forward, the catering business remains a strong opportunity for Panera Bread to grow its customer base. Currently, this segment contributes just around 7% to the total sales. However, the recent growth of 21% in this segment in the fourth quarter has been impressive. During the first half of 2013, the company is focusing on certain new initiatives to gain from this opportunity. These include new web-based ordering system that will drive down its costs, thus enhancing its profitability. Overall, I believe the catering business will grow to a level of around $500 million in revenue over time.
For the investors
The stock price of Brinker offers an attractive opportunity with the EPS estimate of around $2.62 for its fiscal year 2014, a dividend yield of 2.5%, and around $500 million of expected share buyback program.
But, I remain doubtful about McDonald’s in the short-term due to rising competition in the industry. But the long-term prospects seem favorable, with its initiatives in the Dollar Menu and the improving US performance.
On the other hand, Panera Bread is one of my favorite picks for 2013. Along with the growing sales of its signatures items and the upcoming launches, its catering business also gives me confidence about the future prosperity.
madhudube has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Panera Bread. The Motley Fool owns shares of McDonald's and Panera Bread. 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!