Tasty Fast Food Companies Worth Waiting For
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We are in the post-health craze world, but fast food restaurants are still around. I suppose the healthy eating trend still exists, but it is not as red hot as it was at the turn of the century. Fast food restaurants have rolled with the punches, and now many offer healthy alternatives, and some places even have nice fresh food. People always need to eat, and I do not see the trend of a fast-paced busy lifestyle disappearing any time soon. That's why fast food companies potentially make great long-term investments.
McDonald's (NYSE: MCD) seems to be the biggest and safest bet, and apparently fast food weakness in China and other emerging markets is creating an opportunity. McDonald's has a nice dividend with a 3.49%, and any opening should be welcome. Sales might be weak now, but that might not continue. The weakness stemming from China seems to be generalized, rather than a problem internal to the company. Yum! Brands (NYSE: YUM) got hit even harder by Chinese weakness, but at least the company is opening less locations next year.
McDonald's is losing ground to competitor Burger King Worldwide (NYSE: BKW). It seems like the King has taken a page from McDonald's book. The new menu items seem to be doing well. It is not entirely surprising that a company that was just recently made public again would have a new strategy in place. Borrowing the strategy from a more successful rival should not raise any eyebrows. Burger King interests me because it has a lot of ground in front of it. Having just gone public it is a bit more green, but that also means it has the potential that comes with a smaller company.
Burger King does not really have a lot of information on the stock sites. If you look at Yahoo! Finance most of the fields are blank. It will take some time before we have a proper picture of the company from a financial point of view. For now you can rely on any filings. The company does sport a small dividend, but I would not look at it like an income investment just yet.
McDonald's has a great dollar menu, and that might be the problem. You can get stuffed on McDonald's food for less than $5, and if you ate it often you might even gain weight. So I am not ordering $20 worth of food off the dollar menu. That's why the strategy of fortifying the dollar menu is misguided. I think consumers are willing to pay more for interesting food. The company needs to have some of those dollar customers buy something for $5 or $6. The dollar menu will be there so anyone that does not want to buy more expensive food can order off of it. On the other hand, a more interesting spread can attract some customers away from other fast food restaurants. Taco Bell has that new healthy taco salad, which is fresh and delicious. I am not sure if its nationwide, but I sometimes head there instead of Chipotle. I try to limit fast food visits, though. Taco Bell is a Yum! Brands company.
Yum! Brands has a lot of different chains under its belt, such as Taco Bell, KFC, and Pizza Hut. That gives it a flexibility when expanding. Yum! has a higher expected growth rate than McDonald's, and that is why it has a higher P/E ratio. Yum! has a 19.37 ratio, versus16.45 at McDonald's. Since the China weakness hit both companies, this dynamic should not change.
I prefer McDonald's with it stability and nice dividend, but I am concerned about its strategy. However, the slowdown in sales is causing a decline, and once that hits a bottom I hope that the stock shows some stability. I do not think the dollar menu plan will fail, but it might not turn into solid growth of profits. So capital appreciation might be limited, but there should be some. With the solid dividend it seems like a good investment to hold on to. Yum! relies on growth, and I would rather not rely on that materializing as planned. Burger King interests me as well, because it seems to be doing well.
TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide and 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!