Serving Up A Deal

By Chad Henage - July 30, 2012 | Tickers: BKW, MCD, SBUX, WEN, YUM | 0 Comments

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When you say the name McDonald's (NYSE: MCD), most people think of burgers and fries. However, with recent menu additions and the expansion of the McCafé lineup, many people frequent McDonald's for their beverages and healthier options. You can tell that McDonald's is leading the way, when you consider that some of their major competitors, such as Wendy's (NASDAQ: WEN) and Burger King (NYSE: BKW), are changing their menus in lockstep with the company. While McDonald's most recent earnings report was not everything that investors hoped for, the longer-term trend of the company's menu evolution and expanded beverage options bodes well for future results.

A consistent theme in McDonald's recent earnings report was the negative affect of foreign currency exchange. For this reason, long-term investors would be better served to look at the company's comparable sales as a better measure of the restaurant's performance. In all three of the company's major regions, comparable sales increased. In the United States, comps were up 3.6%, in Europe they increased 3.8%, and the rest of the world comps increased 0.9%. You can see from these numbers that more customers were frequenting McDonald's on a regular basis. However, because of currency fluctuations total revenues were flat versus being up 5%. Earnings-per-share was down 2% versus an increase of 3% in constant currencies. Most surprising were the company's results in Europe, considering all the negative economic news from the region. McDonald's would have seen operating income increase 8% in constant currencies. However, because of currency fluctuations, income decreased 3%. Though the reported number was down, in constant currencies this actually would have been the strongest performing region for the company. This appears to be a repeat of the performance that the company turned in when the United States was in the Great Recession. Customers looking to save money are more likely to visit McDonald's than traditional restaurants. For this reason, I believe even if Europe's problems continue, McDonald's will likely see increased traffic and, without currency issues, increased profits. When it comes to future growth, you can clearly see the regions that the company is focusing on.

It appears that even though Europe represents some challenges, that this part of the world as well as Asia Pacific, the Middle East, and Japan, are expected to see the greatest growth in McDonald's restaurant counts. Take a look at the number of restaurants the company has opened in each area of the world over the last year:

You can see from this table, that the majority of open restaurants are in these two growth regions. In addition, apparently both Burger King and Yum Brands (NYSE: YUM) believe in overseas growth opportunities as well. Burger King has announced its intentions to open at least 1,000 restaurants in China, versus their current count of just 63. Yum Brands already is recognized as an international leader in restaurant openings. While these companies represent more traditional competition for McDonald's, the company is also going after the coffee market through its McCafe' beverage line. This places McDonald's squarely in competition with Starbucks (NASDAQ: SBUX), which also has a strong international presence. The question for investors is, which of these major chains deserves a spot in your portfolio?

Where Burger King is concerned, it's difficult to recommend this company given that the shares have just come back into the public market. Though the company could be a strong competitor, Burger King appears content to follow McDonald's lead as opposed to innovating on its own. Where Wendy's is concerned, the company is expected to grow at over 14% in the next few years. This growth, along with the company's 1.7% dividend, would seem to represent an attractive option. However, Wendy's also appears content to follow what McDonald's does, and the company does not have the international focus. Yum Brands and McDonald's get compared a lot, as both companies operate over 30,000 restaurants each, and both are looking at international expansion for future growth. The differentiating factor between the two is that McDonald's is expanding its menu in areas that Yum Brands is not. For instance, McDonald's carries the McCafé line of beverages which appeals to consumers that may stop by during non-meal times. By comparison, Yum Brands' Taco Bell, Pizza Hut, and KFC have no such drink offerings. This leaves Starbucks and McDonald's as our final two choices. Investors looking for growth should start with Starbucks as the company is clearly positioned to show faster growth going forward. Analysts expect EPS growth of over 19% versus just under 10% growth at McDonald's. However, income oriented investors may favor McDonald's and its 3.1% yield versus Starbucks 1.3% payout. Both companies could be attractive options depending on what investors want, growth or income. The difference between the two for me is McDonald's offers a value meal to customers that may hold up better during difficult financial times than the pricier Starbucks.

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