It can be tempting to let your investing decisions get more complicated than necessary. Projecting cash flow into the next decade while trying to assign odds to several possible competitive disruptions might feel like due diligence, but at some point it just clouds the picture.
The best investments have such killer advantages that you don't need to have a precise picture on what an industry might look like years into the future. The company, in other words, can generate strong returns under a wide range of scenarios.
Today, I'm looking at few fast food stocks that meet that high standard. Read on to see why McDonald's (MCD -0.36%) and Starbucks (SBUX -0.39%) should be able to translate their dominant brands and rock-solid finances into market-beating investment returns from here.
McDonald's for its growth
McDonald's has reclaimed first place in the industry after an awesome 2017 that saw comparable-store sales growth come roaring back after a two-year market share slide. The fast-food titan made a few menu improvements that kept customers from fleeing to more upscale casual dining eateries. But its rebound also leaned heavily on its core competitive strength, including iconic items like the Egg McMuffin, Big Mac, and Quarter Pounder.
Promoting these mainstays helped spur a 2% customer traffic boost last year that included higher guest counts across each of its geographic sales territories.
Image source: Getty Images.
CEO Steve Easterbrook and his team don't plan to take a break in 2018. Instead, they're set to spend an aggressive $2.4 billion on capital initiatives, including store remodels and a new home delivery infrastructure.
And yet investors have every reason to expect higher earnings and increased cash returns ahead, in part thanks to a refranchising initiative that should push profit margin to an industry-thumping mid-40% range by 2019.
Starbucks for its global leadership
Starbucks has been struggling for more than a year with declining customer traffic growth. That issue combined with poor merchandising over the holiday season to produce an unusually weak fiscal first quarter for the beverage titan. Comps were up just 2% in the U.S. market to pull overall growth just below management's target of between 3% and 5%.
Image source: Getty Images.
Sure, the slip-up could mean that the coffee king will miss its operating goals for the second straight fiscal year. But that's not the same as saying Starbucks is running out of growth avenues. On the contrary, it owns one of the most successful brands in China, a market that's expected to reach many multiples of the size of the U.S. division over time. Customer traffic jumped 6% there in the most recent quarter to add weight to management's claim that they've "cracked the code on China."
Meanwhile, a rebound in the U.S. segment will come down to Starbucks' ability to extend its breakfast snack and coffee dominance in the peak early morning hours into the afternoon. A bigger lunch menu is already helping, as food sales reached a record 20% of the business in fiscal 2017 and made a further uptick to 21% at the start of fiscal 2018.
Thus, even if Starbucks comes up a bit shy of its annual goals this year, the long-term outlook is bright. It aims to expand overall revenue in the high single digits as it adds thousands of stores to its sales base each year. And, with a return on invested capital that's among the best in the industry, Starbucks' shareholders can have confidence in the company's ability to improve profits at a double-digit pace for the foreseeable future.
