Is McDonald’s Finally a Good Investment Opportunity?

Should you bet on McDonald's going higher or seek value elsewhere in the space?

Jun 15, 2014 at 2:00PM

McDonald's (NYSE:MCD) , the largest restaurant chain in the world, is one of the most recognizable brand names out there.  Yet, does either of these facts automatically make it a good investment? Or, should you find value and opportunity in other restaurants like Bloomin' Brands (NASDAQ:BLMN) and Panera Bread (NASDAQ:PNRA)?

A fundamental peak?
McDonald's has a real problem on its hands: After decades of solid year-over-year growth, fundamental gains have become increasingly difficult. Thus, many are left wondering if McDonald's has now reached its fundamental peak.

Specifically, the company has found itself in a rather bearish streak with seven consecutive months of declining same-store sales despite higher sales in its coffee division. This loss further adds to the notion that consumers are choosing to dine elsewhere, not a good sign if you're a longtime McDonald's investor.

Mcd Sss

Source: Bloomberg

Nonetheless, with $28 billion in revenue last year, McDonald's is not a company that's going to cease to exist any time soon. However, at 18.3 times earnings, investors have shown the willingness to pay a rather lofty premium for a lack of growth, implying that its name power is what supports the valuation.

A cheaper and faster-growing option
With that said, restaurants are good long-term investments, as they are cyclical by nature. Yet, McDonald's is far from the best available option. Specifically, while McDonald's shares sit near 52-week highs, Bloomin' Brands has lost more than 6% of its valuation this year alone.

Bloomin' Brands is the owner of popular chains Outback Steakhouse and Carraba's Italian Grill, among others. While the company's comparable sales were disappointing in the first quarter, flat year over year, Bloomin' is still guiding for growth of 2% on an annual basis.

Moreover, with expected growth of 8.3% and 7%, respectively, over the next two years, Bloomin' is trending in a completely opposite direction relative to McDonald's. Not to mention, at 14.5 times earnings, it's also much cheaper.

Three reasons to buy this stock
Panera Bread is another growing restaurant chain that investors might find preferable to McDonald's long term. While its 22.5 times earnings multiple is significantly higher than either McDonald's or Bloomin' Brands, the company's expected comparable sales growth of 3% this year also trumps its peers.

Furthermore, there are three specific reasons that make Panera an intriguing investment option. First, it's the anti-McDonald's, focusing on healthy eating, which has become a hot trend in the U.S. Second, its Panera 2.0 initiative recently launched, which uses mobile and web applications to increase the speed of service, place orders, and to better communicate with the company. Therefore, it is believed that this emphasis on technology could further spark growth.

Lastly, the company recently announced a new $600 million buyback program, making its 22.5 times earnings ratio look more attractive, as such a program will allow it to reduce the share count by roughly 15%. All in all, these three reasons make Panera an intriguing option for investors.

Foolish thoughts
As we look down the list, there are many solid investments in the restaurant space, many of which are better than McDonald's. Sure, the company plans to return $18 billion to $20 billion to shareholders over the next three years, but relative to its market capitalization and fundamental woes, this alone does not guarantee a good investment or gains.

Instead, growth is what ultimately creates stock gains for investors. And in looking at the space, Panera Bread and Bloomin' Brands are two companies with fair valuations that are growing, making either a superior investment to McDonald's.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Panera Bread. The Motley Fool owns shares of Panera Bread. 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.

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