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A food court in the UAE.
We are in the post-health craze world and fast food restaurants are still around. I suppose the healthy eating trend still exists, but it is not as red-hot as it was at the turn of the century. Fast food restaurants have rolled with the punches and now many offer healthy alternatives, and some places have nice fresh food. People need to eat, and I do not see the trend of a fast-paced busy lifestyle disappearing any time soon. Fast food companies potentially make great long-term investments because of this.
McDonald’s Corp. (NYSE: MCD) seems to be the biggest safest bet, and apparently fast food weakness in China and other emerging markets is creating an opportunity. McDonald’s has a nice dividend with a 3.49%, and any opening should be welcome. Sales might be weak now, but that might not continue. The weakness stemming from China seems to be generalized rather than a problem internal to the company. Yum! Brands Inc. (NYSE: YUM) got hit by Chinese weakness even more, but at least the company is opening less locations next year.
Turning to McDonald’s competitors is losing ground to Burger King Worldwide Inc. (NYSE: BKW). It seems like the King has taken a page from McDonald’s book. The new menu items seem to be doing well. It is not entirely surprising that a company that was just recently made public again would have a strategy in place. Borrowing the strategy from a more successful rival should not raise any eyebrows. If you want great stability wait for McDonald’s to finish its decline. It could form a successful long-term position for any portfolio. Burger King interests me as having a lot of ground in front of it. Having just gone public it is a bit more green, but that also means it has the potential that comes with a smaller company.
Burger King does not really have a lot of information on the stock sites. If you look at Yahoo! Finance most of the fields are blank. It will take some time before we have a proper picture of the company from a financial point of view. For now you can rely on any filings. The company does sport a small dividend, but I would not look at it like a dividend investment just yet.
McDonald’s has a great dollar menu, and that might be the problem. You can get stuffed on McDonald’s food for less than $5, and if you ate it often you might even gain weight. So I am not ordering $20 worth of food off the dollar menu. So the strategy of fortifying the dollar menu is misguided. I think consumers are willing to pay more for interesting food. You do not need more dollar customers. The company needs to have some of those dollar customers buy something for $5 or $6. The dollar menu will be there so anyone that does not want to buy more expensive food can order off of it. On the other hand, a more interesting spread can attract some customers away from other fast food restaurants. Taco Bell has that new healthy taco salad, which is fresh and delicious. I am not sure if its nationwide, but I sometimes head there instead of Chipotle. I try to limit fast food visits, though. Taco Bell is a Yum! Brands company.
I recently stopped by a McDonald’s and tried the premium roast coffee. It is not bad, and if I was looking for something to eat in the morning with my coffee I might stop by the drive-thru. Starbucks Corp. should not be worried though. McDonald’s coffee is not a match for Starbucks coffee, but it’s reasonably priced and tastes good enough. I just think this focus away from food is doing more harm than good. The menu could do with some more interesting food. I mean Carl’s Jr. has some fantastic burgers on its menu, and nothing at McDonald’s quite measures up in my opinion. Those burgers have lots of fans from what I have seen, and no expansion of the dollar menu is going to meet the margins of those fancier burgers. I am not going to believe that those six-dollar burgers have the same margin as a $1 double cheeseburger.
Yum! Brands has a lot of different chains under its belt such as Taco Bell, KFC, and Pizza Hut. That gives it a flexibility when expanding. Certain chains will work better in different countries. Imagine a culture that eats no chicken, and then stick in a KFC. That seems like a bad choice. Perhaps Taco Bell or Pizza Hut would be a better choice there. Yum has a higher expected growth and that is why it has a higher P/E ratio than McDonald’s. Yum has a 19.37 ratio versus 16.45 at McDonald’s. Since the China weakness hit both companies this dynamic should not change. Yum is still expected to do better. I am not really interested in relying on expected growth after the weakness in China.
I prefer McDonald’s with it stability and nice dividend, but I am concerned about its strategy. However, the slowdown in sales is causing a decline, and once that hits a bottom I hope that the stock shows some stability. I do not think the dollar menu plan will fail, but it might not turn into solid growth of profits. So capital appreciation might be limited, but there should be some. With the solid dividend it seems like a good investment to hold onto. Yum relies on growth, and I would rather not rely on that materializing as planned. Burger King interests me as well, because it seems to be doing well. I to borrowed from McDonald’s book and is succeeding so far.
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