What Fast-Food Stocks Need for a Strong 2014

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Fast-food stocks had a challenging 2013, for a variety of reasons. McDonald's (NYSE: MCD  ) saw limited same-store sales growth because of the rapidly evolving consumer landscape, in which North American consumers continue to opt for healthier food choices. At the same time, Yum! Brands (NYSE: YUM  ) struggled under the weight of an investigation in China pertaining to the safety of its Kentucky Fried Chicken. This caused business to deteriorate in China in 2013.

While at first glance the outlook for fast-food stocks might seem glum heading into 2014, investors shouldn't worry. There's plenty of growth left for the taking, thanks to strong international potential, particularly in emerging markets.

Why international expansion is critical this year
While it's reasonable to suggest that continued trends toward healthier lifestyles in North America will keep a lid on domestic growth, there's plenty of growth to be had for Yum! Brands and McDonald's. This is because of international expansion, which will be key for their future growth. Each company understands that American consumers are changing their eating habits, and is taking swift action to evolve.

For instance, Yum! Brands plans aggressive international expansion in the upcoming year. Yum! Brands expects global capital expenditures to total $1.2 billion, which will largely be spent on new locations. The company expects to open at least 1,850 new restaurants outside the U.S. in the year ahead, which includes 700 new units in China and 150 new units in India. This compels management to expect 20% earnings growth in the upcoming year.

Meanwhile, McDonald's will spend as much as $3 billion next year on at least 1,500 new restaurant openings, the vast majority of which will be in the emerging markets. Management believes it has an opportunity to leverage its world-class brand in underpenetrated emerging markets. Because of these initiatives, McDonald's guides investors for at least 3% to 5% systemwide sales growth and 6% to 7% operating income growth.

Why Wendy's may be vulnerable
Wendy's (NASDAQ: WEN  ) may be at a disadvantage because of its relatively cautious stance on international expansion. To be sure, Wendy's had a fantastic 2013, as its turnaround efforts materialized. The company made progress in transitioning to the highly profitable franchise model, and improved its balance sheet. However, there's only so much growth to be had in North America, where Wendy's generates the vast majority of its profits.

Wendy's opened 45 international locations in 2013, but closed between 15 and 20 locations. Clearly, the net effect of its international expansion efforts are negligible. Wendy's will likely see benefits from its franchise transformation strategy, which will continue into the first half of the year, but its growth trajectory is questionable.

Growth initiatives are key to shareholder rewards
Yum! Brands, McDonald's, and Wendy's each pay dividends and spend plenty on share buybacks. The potential for growth of these shareholder programs, however, is subject to overall profit growth. In the case of Yum! Brands and McDonald's, shareholders are likely to continue receiving the large amounts of cash they're accustomed to.

Yum! Brands expects to reduce its average diluted shares outstanding by 1% due to share repurchases. McDonald's, of course, is well-known for its generous shareholder policies. For all of 2013, McDonald's expects to return between $4.5 billion and $5 billion to investors through the combination of dividends and share buybacks.

To summarize, for U.S.-based fast-food companies, expansion is critical for future growth. There's no denying that consumer preferences are evolving in the United States. That means that industry heavyweights such as Yum! Brands and McDonald's face intense pressure to grow in emerging markets. While Wendy's has been successful in its turnaround efforts, shareholders are concerned that it may not be able to meaningfully expand outside North America.

Our top pick for 2014
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2784110, ~/Articles/ArticleHandler.aspx, 9/4/2015 2:06:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:00 PM
MCD $96.01 Down -0.03 -0.03%
McDonald's CAPS Rating: ***
WEN $9.01 Down -0.01 -0.11%
The Wendy's Compan… CAPS Rating: ***
YUM $80.22 Down -0.05 -0.06%
Yum! Brands CAPS Rating: ****