Are Fast Food Restaurants Showing Great Value?

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

As consumers continue to struggle making ends meet, eating out has become less of a priority. As a result, major fast food operators have shown less-than-stellar year-over-year sales and tepid earnings forecasts. Nonetheless, some of them seem to display some nice value, and look worthy of a buy given their current values and future prospects.

Does McDonalds (NYSE: MCD) merit a buy here?              

Surely, you have heard of McDonalds and quite possibly even eaten there as the “Golden Arches” are simply ubiquitous with approximately 34,000 restaurants in operation in 120 countries. With the juggernaut now churning over $27.5 billion in annual revenue and a market capitalization well in excess of $90 billion it clearly is not going anywhere. The stock though has shown some volatility due to continued world-wide economic angst and some disappointing year over year sales data. However, looking at it from a value lens, the company looks worthy of a buy now.

The company is now historically cheap at just a 17.5 times trailing P/E and 14.5 times forward P/E. With the company able to run its business efficiently, it continues to sport mouthwatering operating margins exceeding 30% and returns on equity at approximately 39%. Perhaps most importantly, the company yields a consistently growing 3.3% dividend yield compared to the average Fortune 500 company yielding a much smaller 2.0%.  Add in the fact that at its current dividend, the payout ratio is considerably below 60% signaling to us that it has a strong chance of raising the dividend again soon.  I think McDonalds is a solid buy here.

Is YUM! Brands (NYSE: YUM) yummy for investors?

YUM! Brands is a formidable competitor for McDonald's, operating 38,000 total restaurants in 120 countries with the popular Taco Bell, KFC, and Pizza Hut brands under its umbrella. This former Pepsi subsidiary has now grown to an over $13.5 billion annual business and a market capitalization at approximately $30 billion. The company recently whiffed at analysts’ estimates widely, and took a sizeable hit on its share price, creating what I think is a buying opportunity.

Prior to this most recent quarter, Yum! exceeded  analysts’ estimates in the previous two quarters, showing that this recent slip perhaps was an anomaly. Moreover, like McDonalds, Yum!'s management does a wonderful job running its business; operating margins are in excess of 16%, and returns on equity an astounding 76%.

Add in the historically cheap 19 times railing and 17 times forward P/E, and you have further proof that YUM! is ripe for the taking.  Lastly, the company pays a nice and consistently growing 2.1% dividend yield. At a current payout ratio below 40%, investors can be very confident that the dividend will continue to be raised again soon.

Should we buy Starbucks (NASDAQ: SBUX) stock, rather than just its coffee?

Starbucks, like these two previously mentioned companies, is very well-known worldwide. The company has annual revenues exceeding $13.5 billion, and a $40 billion market capitalization, to prove that point. The company, though, is trading considerably below the $62 52-week high it reached last April. Is now the time to buy?

I believe the answer is yes. Even though the company is more expensive than the previous two from an earnings standpoint -- now at a 29 times trailing and 20 times forward P/E -- the company is expected to grow considerably faster.

In fact, with expected annual growth of 18.5%, Starbucks is expected to more than double McDonald's per annum growth rate over the next five years (9%), and to grow 50% faster than YUM! (12%). Therefore, the company is actually trading lower than both from a price-to-expected growth rate valuation. If anything, analysts may have actually been conservative, as the company has met or exceeded consensus estimates in three of the past four quarters. Operating margins come in strong at 14%, while returns on equity do as well at 29%. Add in its consistently growing 1.5% dividend yield, and I think Starbucks should be a winner.

The Foolish conclusion:

The economy continues to find it tough to get back on solid footing. Fast food restaurants have been experiencing the same dilemma. However, if investors are able to look at the long-term scenario, I believe the three stocks listed above will serve them well, and provide a nice dividend in the process.

Wiseinvestors has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. 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!

blog comments powered by Disqus