McDonald's Corp. (NYSE:MCD) celebrated its 60th birthday this past week, but the normally festive occasion came at a particularly unhappy time in the company's history. The fast-food chain is coming off one of its worst years ever as same-store sales fell around the globe due in part to a food-safety scandal in Asia, political turmoil in Russia, and rising competition at home.
During its six-decade history, McDonald's has come to define fast food around the world, and at a market value a near $100 billion it is far and away the world's biggest restaurant company. However, the latest earnings results show that supremacy is clearly in jeopardy. The board last month made a change in the CEO chair, hoping new blood can help get Ronald back on his feet. Investors are surely hoping for the same. Though McDonald's stock soared during the recession while much of the market sunk, since 2012 the stock has been a stinker, flat as a McGriddle while the broad market has jumped 64%.
Investors hungry for growth could be better off looking elsewhere on the market menu. Three of our top analysts offer up their favorite restaurant stock picks below:
Jeremy Bowman (Habit Restaurants): Though you wouldn't know it from McDonald's earnings reports, its core menu item -- the hamburger -- is hotter than ever. Better-burger chain Five Guys expanded nationwide in a flash, and plenty of other chains like Smashburger and In-N-Out Burgers have found ample room for growth and a loyal following.
In the investing space, Shake Shack (NYSE:SHAK) has captured the headlines, but I think Habit Restaurants (NASDAQ:HABT), a lower-profile, recent IPO in the industry, is the better play here. In its short history as a publicly traded company, results have sizzled. Management gave a preliminary peek at first-quarter earnings earlier this month, projecting same-store sales growth in the 12.5% range, and overall revenue jumped 47% in the closing quarter of last year.
The company has shown it's no slouch on product, either, ranking No. 1 in a Consumer Reports survey of 65 burger chains nationwide. Habit is still small, having just opened its 100th restaurant last year, but management intends to open 26 to 28 company-owned restaurants in 2015, expanding the base by about 25%. Considering the success of Five Guys and other national burger chains, I could easily see room for 1,000 or more Habit locations across the country, particularly as strong same-store sales growth indicates pent-up demand. Profits have been slim thus far, but with double-digit comparable sales growth that shouldn't be a problem for long, and I think growth is a more important concern than immediate earnings for a company of this size. With a market cap of just $300 million, there's plenty of room for the stock to grow as well.
Andrés Cardenal (El Pollo Loco): With only 172 company-owned restaurants and 243 franchised locations as of the end of 2014, El Pollo Loco (NASDAQ:LOCO) is considerably smaller than McDonald's. This makes El Pollo Loco a much riskier stock, since the company does not have the same global scale and size advantages as the fast-food giant.
On the other hand, El Pollo Loco offers far superior growth potential. Management plans to open 16 new company-owned restaurants and 11 franchised locations during 2015, and intends to deliver unit growth in the range of 8% to 11% in the coming years. Over the long term, the company estimates it has room for approximately 2,300 locations in the United States alone.
El Pollo Loco specializes in fire-grill chicken recipes inspired by Mexican cuisine. The company is positioned as a healthier alternative to traditional fast-food chains and it offers competitive prices. Most menu items are priced between $5 and $7, and the average per person spend is $5.83. El Pollo Loco is also well positioned to benefit from changing industry demand as many consumers move away from traditional fast food due to health considerations.
The company's menu is resonating well among customers: total revenue during the 14-week period ended in December 2014 grew 18% year over year to $90 million, while comparable company-operated restaurant sales grew 6.4% year over year, driven by a 3.3% increase in average check and a 3.1% increase in traffic.
For long-term investors willing to withstand higher volatility in exchange for superior potential for growth, El Pollo Loco looks like a much tastier choice than McDonald's.
Bob Ciura (Popeyes Louisiana Kitchen): Popeyes (NASDAQ:PLKI) has an amazing growth story that's not over yet. While McDonald's continues to flounder in both the U.S. and abroad, Popeyes is growing like a weed.
Last year, global same-store sales increased 6.2% -- well ahead of McDonald's growth (or lack thereof) -- and Popeyes opened 201 new locations, up from the 194 restaurants it opened in 2013. Earnings per share were up 15% last year too, again far higher growth than McDonald's flat earnings.
Even better, there's plenty of growth left for Popeyes. The company has implemented an aggressive new store opening strategy to spur growth and anticipates opening another 200-225 new restaurants. Meanwhile, analysts on average expect Popeyes to earn $1.90 per share this year, which would represent 15% growth. Long term, management expects to keep new unit growth between 5% and 7%.
According to Popeyes' 2013 annual report, $100 invested in its stock on Dec. 28, 2008, would have been worth $869 at the end of 2013. That's a huge return over a five-year period, making Popeyes an eight bagger in that time. By comparison, an equal investment in the S&P 500 index would be worth $235 -- a satisfactory return, but nowhere near Popeyes'. The stock is up 44% in just the past 12 months. These growth metrics signal opportunity for investors looking for alternatives to McDonald's sluggish performance.
Andrés Cardenal has no position in any stocks mentioned. Bob Ciura owns shares of McDonald's. Jeremy Bowman owns shares of HABIT RESTAURANTS INC COM CL A. The Motley Fool recommends McDonald's. 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.