Does Fast Food Equal Fast Money?
Michael 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) shares have been anything but exciting, returning only 7.4% year-to-date. Investors have had a hard time betting against this company over the years, and for good reason; McDonald’s is a brand that generations have loved, and continue to flock to in increasing numbers both in the U.S. and abroad.
Mixed earnings report may uncover buying opportunity
The company's last quarter’s earnings, released on July 22, met consensus estimates on the revenue side, coming in at approximately $7.1 billion. This revenue number is a slight increase from a year ago, but the company's earnings per share came in $0.02 below average analyst estimates of $1.40 per share. This downturn in EPS may be one of the reasons traders punished the stock the following day, sending shares down almost $1.00 to finally close at $96.76, down $0.82 on the day.
There are only 9.1 million shares being shorted, representing less than 1% of shares outstanding. This signifies the big players of McDonald’s stock are net-long this position. They probably must keep the position due to the stock's membership in multiple indices, which forces mutual funds following them to hold shares of composite companies. Additionally, McDonald’s shares trade just under 12 times earnings. This is below its trading history and industry average of 15 times EPS, making this a cheap stock.
The McDonald's brand is here to stay
The business itself should be the focus on any investment thesis. Although the fast-food market is saturated here in the U.S., the push into emerging markets has helped McDonald's keep the revenue stream growing, along with profit margins. It has had tremendous success with the value menu, and there are no signs showing this success will end any time soon. McDonald’s is a household name that isn’t going anywhere for generations, and a long position of this stock should be accumulated on any significant pullback on the stock.
For McDonald's, a strengthening European and Chinese market should translate into overall growth as we enter into 2014. According to the most recent earnings release, investors should see increased numbers in same-store sales in the overseas market as well as the U.S. This is great news for investors as it seems McDonald's will continue its reign as the fast food king.
Tacos, pizza, and fried chicken all spell Y-U-M!
Yum! Brands (NYSE: YUM) also offers the opportunity to enter at attractive levels. The operator of Taco Bell, Kentucky Fried Chicken, and Pizza Hut is a behemoth in the fast-food industry.
Disappointing performance doesn't mean this stock is fried
Its last earnings call was a disappointment to the Street, but nonetheless expected. On July 10, Yum! Brands gave a six-month revenue number of $5.4 billion with operating profit of $877 million, down $500 million and $300 million, respectively, over the same period last year. For 2013, the company is not changing its EPS estimate of a mid single-digit percentage decline versus the prior year. Additionally, consistent with previous estimates, it expects that a 16% EPS decline in the second quarter of this year will be the low point of the year.
The stock has moved higher 4.9% year-to-date, which means with a bumpy second quarter, many shareholders and institutional investors realize the forward earnings potential coming from this company. Yum! Brands, like McDonald’s, has become nationally recognized through its brilliant branding efforts of its subsidiaries, most notably Taco Bell. The number of shares sold short dropped from 12.5 million in March to 5 million shares today. Once again, I see a net-long position for a company whose earnings may dictate sell orders, if they were in another industry.
The business outlook for Yum! remains strong
Sales in the United States grew by only 1% compared to 7% in the prior year. The lackluster performance for Pizza Hut in this region (2% decline in sales) was buttressed by sales growth at Taco Bell and KFC by 2% and 3%, respectively. The industry growth rate, including the U.S. sales growth rate of competitors, is approximately 1%. That being said, Yum! Brands spreads investor’s risk across a global franchise model, which has amounted to steady revenue streams and positive free cash flow.
Wendy's recipe for success
Wendy’s (NASDAQ: WEN) finally broke out of its trading range, where it's been stuck for three years. This mainstay for fast-foodies is offering investors a value investment along with cheap eats.
Fundamentally speaking, Wendy’s just had a great earnings call. On July 23, it announced a 25% increase in the quarterly cash dividend, raising it from $0.04 to $0.05 (payable Sept. 17). The company recorded a same-restaurant sales increase and incremental sales from a higher year-over-year net number of company-operated restaurants. This was the main driver in raising operating profits by nearly $20 million from the same period last year.
Wendy’s reiterated its outlook for fiscal year 2013 with an estimated EPS of $0.20 to $0.22, and also stated it is trending toward the high-end of profit margin expectations of 14.5% compared to 14% a year ago. This has driven the shareholders mad to buy this stock, as it rocketed from $5.00 to over $7.00 on high volume.
A fresh start for a old company brings positive changes
The recent positive reaction in stock price has been founded on the growth of its business. Wendy's has seen the pretzel cheeseburger explode with success and most probably will be a steady offering on Wendy's menu. This new concoction by Wendy's chefs is such a hit, many analysts expect it to take market share from McDonald's and Burger King's flagship offerings, the Big Mac and Whopper, respectively.
Alongside new menu items, Wendy's has embarked on an self-titled Image Reactivation, where the 6,500 stores will get a revamped logo and interior design. This is keeping up with the industry's shift to make fast-food dining more luxurious and family oriented.
The evolving Wendy's, diverse Yum! Brands, and ubiquitous McDonald's brand bring more choices to the investment table. They are on investors' value menu, and should be looked at closely. I feel all three will enter 2014 strong and deserve a hard look for an investor willing to ride the fast-food ebb and flows.
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Michael Mandala has no position in any stocks mentioned. 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!