The fast-food industry is notoriously challenging and competitive, but that doesn't mean investors should stay away from the sector. On the contrary, companies such as McDonald's (NYSE:MCD), Burger King Worldwide (UNKNOWN:BKW.DL), and Wendy's (NASDAQ:WEN) offer attractive characteristics for investors with different tastes.
With nearly 34,500 restaurants across the globe, McDonald's is the undisputed heavyweight champion in the industry. Brand recognition, economies of scale, and abundant financial resources provide a sound investment. In addition, McDonald's has placed its restaurants in many of the most desirable locations in major world cities, and that's an invaluable competitive strength in the industry.
More than 80% of the company's stores are franchised; this means that McDonald's benefits from high profit margins, stable cash flows, and minimal capital requirements. This capital-efficient business model allows McDonald's to reward shareholders with growing dividends in the long term: The company has consistently raised its dividends in each and every year since 1976.
Things have not been easy for the company over the last few quarters, growth has slowed down due to increased competitive pressure in a highly saturated market. Besides, weak consumer spending and the trend toward healthier eating habits are providing a serious challenge for the industry as a whole. In this context, McDonald's delivered a lackluster increase of 0.5% in global comparable-store sales during November.
The company is planning to turn to new promotions and product innovations to accelerate growth. The good news for investors is that current valuation looks undemanding considering the company's cheap forward P/E ratio in the area of 16. Besides, shareholders are being well rewarded for their patience with a tasty dividend yield of 3.4%.
Burger King is back with a vengeance
Brazilian private equity firm 3G took Burger King private in 2010, but the company came back to the public market in 2012 with a renewed business model and increased profitability. The stock has risen by more than 30% over the last year, so investors seem to like the way things are going for the company.
The company has refranchised many of its restaurants in the last few years, and it now operates under a fully franchised business model. Burger King is also remodeling its stores and introducing smart menu innovations like its successful lower-calorie french fries, Satisfries.
These initiatives are having a strong positive impact on profitability; adjusted EBITDA margin increased to a whopping 64% of revenue during the third quarter of 2013 versus only 35.7% in the same quarter of 2012. Burger King still has room for store expansion, especially in international markets; the company opened 592 new restaurants during the fiscal year ended in September to a total of 13,259 stores.
Burger King is materially more expensive than McDonald's, with a forward P/E ratio near 24 and a modest dividend yield of only 1.2%. But the company offers higher growth prospects in the middle term if it can continue increasing its profit margins and expanding its store base over the coming years.
Wendy's is red-hot
Wendy's is truly firing on all cylinders. The stock has risen by nearly 90% over the last 12 months as the company is successfully selling restaurants to franchisees, revamping its store image, and launching widely successful alternative offerings such as its Pretzel Bacon Cheeseburger, Pretzel Pub Chicken sandwich, and Bacon Portabella Melt on Brioche.
There is no slowdown in sight. Wendy's announced preliminary results for the fourth quarter on Monday, and both the figures for that period and guidance for the coming year look quite appetizing.
Same-store sales were up by 3.1% in North American company-operated stores during the fourth quarter, a material improvement from a 0.2% decline in the same quarter of 2012. Franchise same-restaurant sales in North America increased 2.8%, compared to a decrease of 0.6% in the year-ago quarter. Management expects to deliver a healthy sales increase of 2.5% to 3.5% at company-operated restaurants during 2014.
Wendy's trades at an expensive forward P/E ratio near 30, but the company offers a lot of room for growth considering its impressive progress in recent quarters and its relatively small location base of nearly 6,500 stores.
Rare, medium, or well-done? There are different opinions for the best way to cook a burger, and the same is true in making decisions to invest in burger restaurants. McDonald's is the defensive play with an attractive valuation and a tempting dividend yield. Wendy's offers superior potential for gains in exchange for a spicy valuation, while Burger King is somewhere in the middle in terms of growth versus value. Depending on your taste in investments, there is plenty to choose from on the menu.