2 Fast Food Chains to Avoid and 1 to Buy

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Fast food is big business in the United States. The seemingly saturated market is filled with publicly traded stocks for investors to choose from. While many fast food chains might seem identical on the surface, not all companies are thriving.

In light of this, it’s crucial for investors to separate the wheat from the chaff when considering the major fast food chains. Here’s two to stay away from, and a clear industry winner for investors to buy.

Fast food, slow growth

On June 25, Sonic (NASDAQ: SONC) issued a third-quarter earnings report that left a lot to be desired. The $800 million company by market value saw its total revenue fall 2% and same-store sales, which measures only those locations open at least a year, inched up 0.1% from the prior year’s third quarter.

It’s worth noting that Sonic’s earnings per share rose 8%, to $0.26 per share during the quarter, but that was due largely to lower costs.

Going forward, the picture remains cloudy at best. Management expectations are for same-store sales growth in the low single-digits on a percentage basis. Even less convincing is the fact that management warned that the weak economic recovery may cause what it called ‘sales volatility.’

It seems that this is management’s way of subtly warning shareholders that the company may not realize any same-store sales growth this year. This is troubling, since cost-cutting can only go so far. Sales are the life-blood of any business, and Sonic isn’t exactly instilling confidence among its investors.

Meanwhile, competitor Jack in the Box (NASDAQ: JACK) wrapped up a difficult quarter of its own. The $1.7 billion stock reported second-quarter GAAP diluted earnings per share fell 37% year over year. On a non-GAAP basis, which excludes expenses like restructuring charges and losses from re-franchising, Jack in the Box’s diluted EPS rose 10%.

Same-store sales at both Jack in the Box and its Qdoba Mexican Grill were less than impressive, rising 0.9% at Jack in the Box and actually falling 2% at Qdoba during the quarter. These results stand in stark contrast to the 5.6% and 3.8% same-store sales growth Jack in the Box and Qdoba enjoyed last year, respectively.

Unfortunately, the hard times facing fast food chains aren't limited to the smallest competitors. Industry juggernaut McDonald’s (NYSE: MCD), which holds a nearly $100 billion market capitalization and operates close to 35,000 restaurants in more than 100 countries worldwide, had a difficult first quarter of its own.

While McDonald’s reported global same-store sales growth of 2.6% in May, the company’s first-quarter diluted earnings per share rose just 3% in constant currencies during the quarter. Also, McDonald’s global same-store sales fell 1% during the first three months of the year.

The shareholder rewards say it all

While financial results from quarter to quarter can be manipulated, there’s no faking the amount of cash a company returns to its shareholders. A company can’t buy back its own stock or pay dividends to shareholders unless it has the underlying financial ability to do so. And from a long-term perspective, a key criteria of truly Foolish investing, only the best companies can maintain decades-long histories of rewarding shareholders.

That’s where McDonald’s simply beats the field among fast-food chains. The industry giant returned $1.1 billion to shareholders during the first quarter via share repurchases and dividends. Looking further back, McDonald’s has a track record of rewarding shareholders that is simply hard to beat.

McDonald's has increased its dividend every year since its first dividend payment in 1976. The stock yields 3.2% at recent prices.

Unfortunately for shareholders, neither Jack in the Box nor Sonic pays a dividend. In addition, both companies trade for more expensive multiples than McDonald’s. Jack in the Box and Sonic trade for 29 and 22 times trailing earnings, respectively, while McDonald’s changes hands for a much more reasonable 18x.

Not only does it carry one of the most easily recognized, most valuable brands in the world, but McDonald’s also offers investors the downside protection of strong dividend payments every year. The company trades for a more compelling valuation than its peers, and as a result, is the best fast food chain to buy today.

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Robert Ciura owns shares of McDonald's. The Motley Fool recommends McDonald's. 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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