Burgers are so passe, are they not? I mean, the idea of eating a quarter pound of ground chuck on a mass-produced bun with processed cheese, a slice of tomato, some iceberg lettuce, and a bunch of ketchup, mustard, and mayonnaise just sounds grotesque to our 21st-century tastes. These days, it's all about lattes from Starbucks (NASDAQ:SBUX) and healthy organics from Motley Fool Stock Advisor pick Whole Foods (NASDAQ:WFMI), right?
Well, let's not get too carried away. A big, mouthwatering burger is practically a delicacy in its own right. An endless variety of burger joints still cater to America's love for the sandwich.
But Americans love their time as much as they love their burger. That's why no matter how famous Cheeburger Cheeburger's famous burger becomes, fast-food burgers will remain a significant part of the American diet. In its annual forecast of the industry, the National Restaurant Association estimates that Americans will spend $142 billion on fast food in 2006. You can bet that Wendy's (NYSE:WEN), McDonald's (NYSE:MCD), Checkers Drive-In (NASDAQ:CHKR), and Steak n Shake (NYSE:SNS) will be right there cashing in. Let's take a look at the latest from these burger businesses and see what they serve up as potential investments.
Hamburgers -- an old-fashioned style of investing
Not enough can be said about corporations with the ability to steadily increase their net worth over a significant period of time. One company that has been under my radar but has done an admirable job of increasing the value of its stock over the years is Wendy's. Since hitting lows in 1990, its shares have climbed from the low single digits to current all-time highs in the upper $50s.
Much of this success has been dependent on its franchise model. As of its latest annual filing, the company operated 1,487 Wendy's units, with another 5,184 run by franchisees. Additionally, of the 2,721 Tim Horton's, only 98 of these are run by the Wendy's corporation. Tim Horton's has provided the company the best growth recently, with same-store sales in the latest period up 6.7% in the United States. Wendy's, however, is in the process of making Tim Horton's a stand-alone company as it plans an IPO within the next year or so.
In the meantime, it's striving to get the rest of company in tip-top shape. Over the past year, Wendy's has bought back more than 5.7 million of its own shares, according to MarketWatch. Additionally, it recently paid off almost $100 million in debt, closed down over 40 Wendy's units that weren't meeting company standards, and sold roughly 175 real estate properties to franchisees. Going forward, look for Wendy's to continue being slow and deliberate in the number of units it opens -- at this point, the company is looking for quality over quantity. And expect it to turn many of its company-owned restaurants into better-performing franchises. If you're looking to invest in this part of the market, Wendy's is a trustworthy option. But I'd wait for a significant drop to buy, since much of the improvement seems to be already cooked into the stock price.
I'm lovin' this turnaround
Every realm has its ruler, and the king of burgerdom is McDonald's. The company operates 8,000 units itself, with another 22,000 operated by franchisees and third-party affiliates. But after its shares peaked in 1999, McDonald's witnessed a quick demise of its reign. Americans were shifting to healthier foods and lifestyles, and the supersized menu of its past just wasn't going to cut it.
After its stock fell to the low-teens in 2003, the company introduced a new plan to revitalize its struggling enterprise. It revamped its breakfast menu with the introduction of McGriddles. And then it went on to bring some life to its entire menu by offering healthier and better-quality food options. The effect was immediate, as same-store sales were back on the rise. With improving revenues came a rebounding stock, storming back into the mid-$30s. This Fool expects McDonald's shares to retest all-time highs in the not-too-distant future as it continues to bring customers back by offering a better-quality product.
The burger for NASCAR fanatics
There's been debate over which burger joint introduced the drive-through concept, but California's In-N-Out, established in 1948, can make a strong argument for being the first. Regardless of who it was, the concept caught fire. Checkers, as well as its Rally's units, have taken it a step further by being the only major burger brand to utilize a "double drive-thru" model that allows automobiles to pull up simultaneously on either side of the restaurant and place orders.
It's fitting for an enterprise that emphasizes an eat-on-the-run experience, with units a quarter of the size of the average fast-food chain, to be the official burger of NASCAR. But it's not just its double drive-thru concept and checkered flag that screams NASCAR. The company uses a stopwatch-like system to meet its objective of serving up a customer's made-to-order burger within 30 seconds.
Unfortunately, the company's sales growth hasn't matched its image of speed -- 2005 revenues have been flat. Checkers does keep a manageable balance sheet and maintains healthy free cash flow, which, combined, should provide it time to develop a strategy to improve sales. Management is currently in the process of forming such a plan, which should continue to reward shareholders in the quarters to come. This is another one to keep tabs on in case its stock sees a pullback, providing an opportunity to initiate a position.
Takhomastock
When you order a milkshake from Steak n Shake, you'll notice one of its trademarks is the plastic cup that you can take home -- the "Takhomacup." You'll also notice that the people at Steak n Shake know a thing or two about making burgers, and the combination of delicious shakes and tasty sandwiches has turned into a solid investment for long-term shareholders.
Of the four companies being reviewed, Steak n Shake is the smallest -- it has only 448 stores in operation. The ample growth opportunities ahead are one reason I like this company as a potential long-term investment. It's currently in the early stages of a five-year plan that includes ramping up unit growth. In the meantime, sales and earnings growth have been steady, increasing 9.6% and 9.5%, respectively, in 2005. With a manageable debt load and healthy operating cash flows ample enough to pay for capital-expenditure increases, the company is well positioned to implement a plan that rewards shareholders who have at least a three- to five-year horizon.
That's a wrap
I've unwrapped more than my share of drive-through burgers over the years. Now I'm looking to take a bite out of some solid long-term investments. These four are at different stages of the game, but each in its own way offers compelling opportunities. Whether it's the successful turnaround plan at McDonald's or Steak n Shake's plan to ramp up unit growth, each is a worthy candidate for further research as a potential investment.
Take another bite of Foolishness, with relish:
- Is it time to get jacked up over Jack in the Box (NYSE:JBX)?
- At least one Fool thinks Steak 'N Shake is a bit shaky.
- McDonald's was once a dream for deep value investors.
Whole Foods is a Stock Advisor pick. For a 30-day free trial and access to Tom and David's best all-around picks, click here.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
