Consumers often find value in quick-service restaurants
From fast-food takeout to higher end, eating out still attractive to diners
As cost-conscious consumers look for ways to save money, quick-service restaurants are attracting a larger share of dining revenue. While this segment of the industry has many participants with varied offerings, I want to focus on a few names that stand out.
Three quick-service restaurants that investors might be most familiar with are McDonald’s (NYSE: MCD), Yum! Brands (NYSE: YUM) and Burger King Worldwide (NYSE: BKW).
McDonald’s dwarfs its competition in size, with a market value of $104 billion, and offers a three per cent dividend yield. Last November, its shares traded lower after the company reported its first negative worldwide comparable sales result since April 2003. However, the stock has since recovered and, with a strong global franchise, McDonald’s is a solid name that lets investors sleep at night.
Yum!, the owner of KFC, Taco Bell and Pizza Hut, generates approximately 50 per cent of its revenue in China. The stock has a market value of $31 billion and offers a two per cent dividend yield. While Yum! is well-positioned for the long-term, the stock’s performance today is too closely tied to China’s economy, which has been volatile of late.
Burger King is a wellknown brand, but its stock only re-listed on the New York Stock Exchange in June 2012. We will wait for Burger King to report a few more quarters before taking a stance on the stock.
While the above companies are leaders in the quick-service industry, we would like to highlight some other higher-end and faster-growing restaurants in the space.
Chipotle Mexican Grill (NYSE: CMG) offers tacos, burritos and salads at its quick-service Mexican restaurants. The company prides itself on offering the highest-quality foods, and it purchases many of its products from organic and local farmers. Chipotle operates more than 1,450 restaurants in the U.S., as well as 11 stores internationally, and plans to open another 165 to 180 locations in 2013. We are concerned about the rapid pace of Chipotle’s expansion, which may cannibalize sales from its existing restaurants and could be contributing to its recent slowdown in com- parable same-store-sales results. Last October, hedge fund manager David Einhorn caused Chipotle’s shares to drop after disclosing that he had shorted the stock, or is betting against the company. Despite these hurdles, the stock has rebounded nicely and is showing strength.
Based on Friday’s closing price of $341.91, the company has a market value of $10.6 billion and its shares trade at a multiple of 28 times 2014 earnings estimates. Chipotle is set to report its first quarter earnings on Thursday, and we will look for an improvement in the results before making a decision on the stock.
Panera Bread (NASDAQ: PNRA) is a leading operator in the bakery-café category, offering fresh-baked bread, sandwiches and salads. The company provides a healthier alternative for consumers on the go at its 1,652 owned and franchised locations across North America. The company added 123 new stores last year, and plans to open 159 new franchised locations within the next five years.
The stock closed Friday near an all-time high at $184.21, implying a market value of $5.4 billion, while its shares trade at a multiple of 23 times 2014 earnings estimates. Panera has further room for growth and is a name to watch.
Buffalo Wild Wings (NASDAQ: BWLD) is known for its chicken wings, open layout and extensive multimedia system in each location, which appeals to sports fans and families alike. The company operates 891 company-owned and franchised restaurants in North America, and believes it can increase its number of locations to 1,700 over the next several years.
The company faces increased headwinds, as the price of chicken wings, an important input cost, has more than doubled over the past 18 months.
Based on Friday’s closing price of $90.69, Buffalo Wild Wings has a market value of $1.7 billion and the stock trades at a multiple of 21 times 2014 earnings estimates. While its growth prospects are intriguing, the variability in chicken prices keeps us on the sidelines.
Overall, McDonald’s continues to be best-of-breed in this industry and is a stable, high-quality dividend-paying stock.
Chipotle and Panera may offer greater growth potential, but currently offer no dividends and their shares are likely to be more volatile. Full disclosure: We own shares of McDonald’s in the Galliant portfolios.
With a strong global franchise, McDonald’s is a solid name that lets
investors sleep at night.