Should You Buy McDonald's or This Stock Instead?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Fast food restaurant chains have taken several steps to create value either through cost cutting measures, re-branding, or international growth expansion. Below, I review what specific steps McDonald's and Wendy's have taken in recent months or even in recent weeks. At the end, I conclude with my thought on which one will outperform.

McDonald's (NYSE: MCD) Pulling Growth Levers

Even though Italy was badly hit by the economic crisis, McDonald’s believes investing in that region will provide very high returns. In my view, investors should read between the lines: if McDonald's believes it can perform well in a challenged market, what does this imply for its strategy in other regions? McDonald's plans on opening 100 new locations around Italy, employing over 30,000 workers, and spending $457 million on the reported expansion. As much as this sounds interesting, it’s a risky move since there are more than 30% less foreign investors in the country after the beginning of the recession.

In the domestic market, McDonald’s is re-introducing the iconic Big Mac in the Americas and hiring a third party ad agency Translation to communicate the update. The new Chicken Wings will also be launching soon in the Chicago area, which has over 500 locations, and it is expeced to be a huge success.

What Wendy's (NASDAQ: WEN) Is Doing to Create Value

Wendy’s recently reported it will act on the Affordable Care Act by cutting work hours for over 100 employees in Nebraska to 28 hours a week--a move designed to avoid paying for mandated healthcare benefits. It is now considering spreading its new program to all Wendy’s locations. While this may save the company money, it comes at several risks: political scrutiny and less-dedicated labor. Employees at fast-food restaurants have high turnover, but weakening the ability of those who desire for full-time jobs to achieve something more than just a "job" could end up decreasing productivity in the long-run.

In regard to political scrutiny, it's not, however, difficult, in my view, to circulate a favorable brand image through a PR blitz. Wendy's apparently doesn't think so either. Wendy’s recently decided to enter a partnership with a medical research institution, Siteman Cancer Center, which will use the donation to fund its research of pancreatic cancer to advance therapies to patients worldwide. A $2 promotion is made in all Wendy’s stores in Missouri where, when a customer buys one $2 meal, he’ll get a free Jr. Frosty. Most of the revenues from the promotion will go to the SCC.

In other plans, Wendy’s is now turning to low-priced menu meals to keep up with their competition--it hopes that 15% of its new revenue will come from these meals. The plan was to offer $0.99 meals in all of its locations worldwide to get the recession-hit number of customers back. Customers are now more carefully spending, and this has hit fast food chains like Wendy’s and McDonald’s in terms of visitors at the worst time (ie., when raw food and labor costs are rising).

Conclusion

So, clearly, we can see that McDonald's and Wendy's are not just resting on the laurels. While McDonald's is seeking to expand its international footprint, Wendy's is seeking to cut costs and re-brand. Which one is more undervalued? In my view, McDonald's is the much more preferable of the two investments. It trades at 15.1x forward earnings versus 25.9x for Wendy's. The latter is just starting to enter the profitable territory, but it's, in my view, too shaky of an investment to buy over McDonald's, which will experience a more predictable 9% annual growth rate over the next five years.


TakeoverAnalyst 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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