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.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers