Hunger Games: Investor Edition
Jamal is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The year is 2012, in this post-apocalyptic investing world each sector must proffer one company as tribute for the insurrection of 2008. These “tributes” shall fight to the death with the winner taking a prominent place in your portfolio. Which tribute will win Hunger Games, Investor Edition?
In order to cut through the numbers like an arrow from Katniss’ quill, we must define what we are looking for. Evaluating fast food restaurants by PEG ratio will show which restaurant wins the games, and those who will fall by the wayside. The chart below takes the current PE Ratio (price/EPS prior 12 months) and then "snapshots" of growth rates (prior five years, projected five years, and prior quarter) to evaluate various PEG Ratios.
Previous Five years
Projected Five years
|PEG Ratio||Growth Rate
Career Tribute: McDonald's (NYSE: MCD)
McDonald's possesses many material competitive advantages, the first being number of locations. US. residents are never more than 120 miles from those golden arches. McDonald's is also a master of efficiency, with profit margins approaching 20%. All isn’t well in McDonald land, however, and one metric is enough to give Mayor McCheese heartburn. Although profit margins at McDonald's are fantastic, they are producing less revenue. The current PEG ratio (PE/projected five year growth) is approaching 1.75 and I fear new management cannot reach analyst projections of growth (9.38%). If the new CEO, Don Thompson, continues the same growth trajectory, the PEG is closer to 8. This career tribute is overrated!
Volunteer Tribute: Yum! Brands (NYSE: YUM)
This volunteer tribute comes to the games as a true underdog. McDonald's is both three times bigger with three times the operating cash flow. Yum! has something McDonald's lacks---a viable long term growth strategy. Yum! is aggressively expanding into China with over half its revenues coming from outside the US. China’s same store sales increased 20% year-over-year and Yum! recently acquired Little Sheep, a Mongolian style restaurant based in China. I feel the PEG Ratio (1.46) does not accurately factor this growth and presents a true buying opportunity for the stock. I believe the five year growth rate should be closer to the current quarter growth rate; bringing the PEG Ratio to 1.17. In addition, Yum has received positive reception from the launch of the Doritos Locos taco. This exciting product should inoculate the other brands from slowing US market growth. Yum! has more upside than currently advertised, and is worthy of a sponsor.
Tribute: Wendy’s (NASDAQ: WEN)
This company should be avoided in your portfolio, or held only for a speculative play. They are currently struggling to execute a growth strategy while managing higher food prices. Wendy’s has fewer stores now than at the end of 2009. They have done a better job at cutting operating expenses, but are still reporting less gross profit than FY 2009. The projected five year growth rate of 10.61 is laughable when you consider this company is making less revenue than they did during the fallout from 2008. This is one tribute that would be slaughtered at the beginning of the games. Value investors should not sponsor this stock.
In the never-ending battle for your hard earned investing dollars, you must separate the weak from the strong. Companies with strong fundamentals while executing viable growth strategies based on true competitive advantages are rare. These are the companies that should have a prominent place in your portfolio. Perform your due diligence, and as always in investing, may the odds be ever in your favor.
jcareagle has no positions in the stocks mentioned above (but he would like to). The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's and Yum! Brands. 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.If you have questions about this post or the Fool’s blog network, click here for information.