Can Starbucks or Yum! Follow the Leader?
Phillip 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) has consistently shown its leadership savvy in maximizing profits by moving abroad to do business, and that effort has been rewarded with buckets of money. Well, maybe not literally buckets, but a lot of money. And nearly $7 billion cash on hand will help its efforts to expand internationally.
The company started its expansion project outside of North America in 1967, when it opened up shop in Puerto Rico, and it hasn't looked back since. With continuing Westernization throughout the world, McDonald's growth potential seems limitless. The restaurant chain has opened nearly 3,600 locations in Japan alone, but that doesn't mean there isn't more room for world domination.
Those who are bearish on McDonald's say the company is faced with increased competition in the market. But with a stranglehold already in North America, and McDonald's leading the way with new, healthier menu ideas, the firm will rise above those competitors internationally, just as it has in the past.
McDonald's doesn't appear to be planning slow growth. In fact, the firm invested more than $2 billion to new stores this year to increase its restaurants throughout the world, which currently number about 34,000.
Analysts expect McDonald's to grow revenue by 2.5% this year and over 5% next year. That will help fuel an EPS bump. That category is expected to increase by 5% this year and 9% next year. It looks like analysts agree with me, and the restaurant chain will see happy days thanks to its international efforts.
Other firms are spending big at international expansion
Starbucks (NASDAQ: SBUX) and Yum! Brands (NYSE: YUM) are also dedicating huge amounts of money to international expansion projects. Expanding in this way can increase profits exponentially, and these are the type of firms that will follow McDonald's lead. Investors should view these companies as young McDonald's, ready to greatly influence the way the world eats and drinks.
Starbucks opening up shop
Starbucks announced about three months ago that it will open 100 new coffee shops in the Philippines and 100 in Indonesia over the next three-to-four years. On June 26, it added to that expansion plan when it said another 100 locations would be opened in Malaysia. That motivation reminds me of a young McDonald's.
The expansion shows that Starbucks' current efforts overseas have been successful, in an area that once didn't have much of a desire for coffee. Part of that expansion includes China, which is mostly known as being a nation full of tea drinkers. Starbucks has proven the bears wrong, by being able to profit in China -- where it costs about 15% to 20% of a daily wage to buy a latte. In the United States, it costs about 2.5% of a daily wage to purchase the drink. However, about 13 million people in China are part of the upper class, which is enough people to stimulate the market. Starbucks has dedicated $1.2 billion this year to further global expansion.
Analysts are also bullish on Starbucks. They believe the company will increase revenue by 12% in each of the next two years. The picture is even brighter for EPS, which are expected to increase by 22% this year and 20.5% in 2014. I anticipate those 13 million member of the Chinese upper class to fuel that growth.
Yum faces challenges in China
Yum! Brands is dedicating $1 billion to global expansion this year. Last month, the firm was given the approval by the Shanghai Municipal Food Safety Committee after Yum! had been accused of poor food quality. However, the scandal will likely still have negative effects on the firm due to the poor press from the incident. More than half of Yum!'s revenue comes from China, so expect a decrease in revenue. The company dominates about 39% of the Chinese fast-food industry.
Analysts also anticipate the challenges in China will drag on revenue. They say the firm's revenue will fall 1% this year, but gain nearly 13% next year. Earnings per share are expected to drop 5.5% this year, but gain 24% next year. However, the price is near historic highs, and I see shares falling during each quarter for the next three reports. Once things are smoothed over in China, I'll think about picking up shares of this stock.
Where to put your money
Starbucks has already impressed me with the way that it has been able to expand quickly in North America. I see the most amount of growth with this firm, and this is where I would put my money. The company has strong growth potential, compared to McDonald's moderate growth and Yum!'s anticipated regression.
Starbucks has made drinking high-end coffee a part of pop culture throughout America. Its efforts to expand that to Asia -- taking what was once a primarily tea-drinking continent and adding coffee to the menu -- shows the mass appeal of the beverage. It also demonstrates the firm's ability to create market demand even in some of the hottest nations in the world.
It's P/E ratio of 34 might seems high to many investors, but that massive growth expectation is warranted. The only major pullback this stock has had in share price was during the recent recession. You might find this company in my portfolio in the days ahead.
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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. 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!