Burger King unleashed their new menu this week offering healthier and more chic alternatives to the traditional fast food diet, exclusive to burgers, fries and pop. Now in what many seem to be a last ditch effort, Burger King is offering items to its customers that seem identical to those on the McDonald’s menu, such as fruit smoothies and seasoned chicken wraps.
Many investors are now starting to take another look at their fast food investments and the stocks of those companies. The Golden Arches, are an excellent story of success and the seemingly limitless bounds to American capitalism. As the stock flirts at $100 a share in early 2012 we have to ask, is it really worth it? And are there really that many options for growth? Even further, if McDonald’s growth will be as desired, what can we expect from Burger King?
Why would investors be shying away from McDonald’s? Arguably because it is too successful and lacks the certain multiples of growth that something like Burger King may offer to stock holders. That is not to say that Burger King is a better company, far from it. Goldman Sachs have downgraded McDonald’s, recognizing their success but noting a slow of growth compared to up and coming growth plays such as Starbucks and Yum Brands.
Fast food stocks are not the most stable or reliable of investments. Although McDonald’s has proven extremely successful in advertising, cutting costs and international exposure other fast food giants have faltered. Wendy’s which is arguably a penny stock and has traded below the $2 point several times in the last few years is barely able to keep above $4 a share. Burger King has struggled since its 20120 acquisition by 3G Capital and has lost extensive market share.
So where are the best investments in fast food? How does one play this side of the stock market?
Overall the best practices coming in buying growth companies centered on international exposure but are also relevant and trend creators, not followers. Perfect examples include Starbucks and Yum Brands.
Starbucks is a perfect example of fast food that plays on peoples desire to live the ‘high life’ but at the same time is affordable enough to be enjoyed by the masses. Locations across the United States have been successful in providing a premium coffee and a trendy experience, one that is a head of the trend, not following it. This is important. Better, Starbucks is not a typical fast food in the old fashioned sense of offering fried food and red meat. Instead, they offer premium coffees in iconic and flavorful styles. Their delicacies and treats offer customers that European feel.
Yum Brands which owns Taco Bell and KFC is in a great position for growth both nationally and abroad. Taco Bell caters to customers with low budgets but who still enjoy a nice pseudo-Mexican meal. Their prices blow the competition out of the water. This is valuable on the domestic front. Internationally Yum Brands has been having increasing success with KFC in China. The booming interest in the fast food classic, offering fried chicken and typical southern home style food has been met with great acclaim. If you cannot have pure growth, take value and international growth like Yum Brands.
These stocks are currently trading for a P/E ratio of 33 and 25, a bit more of a premium than I would want to pay. However with how dangerous some stocks can be and cold promises of growth fast food may be a solid fit to a well diversified portfolio. Playing with cyclical stocks of fast food company’s of which North Americans rely on is a solid strategy for investing with growth and earnings in mind.