Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Which Player to Back in the Fast Food Wars

Companies / Sector Analysis Feb 17, 2015 - 10:41 AM GMT

By: Money_Morning

Companies

Michael E. Lewitt writes: Investors fought over the IPO shares of Shake Shack Inc. (NYSE: SHAK) like kids fighting over a McDonald's Corp. (NYSE: MCD) Happy Meal.

Initially priced at $21.00 per share, SHAK stock ended its first day of trading up over 100% at $45.90, moved to just north of $52 per share, and even after an inevitable pull back is still ahead nearly 95%.


The very trends that are pumping up SHAK's shares have left those of McDonald's – the most iconic name in hamburgers and perhaps in the entire global restaurant business – becalmed. But a third player might be the best bet of them all.

Barriers to Entry Looking Vulnerable

Competition, changing consumer tastes and habits, and some dismal financial metrics have investors wondering what's next for MCD. More importantly, they signal how investors should play the Golden Arches in the future.

And while it is relatively easy to identify why MCD is losing some momentum in the burger wars, it is much harder to know whether it will be able to reverse course. McDonald's increasingly looks, trades, and tastes like yesterday's news. Yes, it is up slightly on a year-to-date basis, and on a five-year basis it beat the giddy S&P 500 until the index rocketed ahead in mid-2013. Nonetheless, given its recent earnings report admission that its sales fell in 2014 for the first time in three years, Ronald's smile is looking a little forced.

In fact, the 2014 Consumer Reports survey of 21 burger brands ranked Mickey D's dead last. When customers are telling a restaurant that the food stinks, it has a serious problem.

The burger chain's menu is also a mess with over 100 items which takes the "fast" out of "fast food" by making it difficult for customers to order quickly. By trying to compete with everybody rather than with just other burger chains, McDonald's is spreading itself too thin and diluting its brand.

Furthermore, in a culture where its food is already avoided by many people with health concerns – are you really going to a burger joint if you want a salad – McDonald's would be better served being true to its identity and making the best burgers in the world.

Will a New CEO Reverse Its Course?

With a still enormous market cap of $92 billion and a significantly above-market multiple of 19.5x earnings, MCD stock has been treading water for the past two years.

One reason that it has held its ground is the announcement that long-standing CEO Don Thompson would be replaced on March 1 by industry star Steve Easterbrook.

It's going to take more than a new CEO to boost performance, however.

While 2013 and 2014 sales were $28.1 billion and $27.4 billion, respectively, Goldman Sachs expects sales to drop to about $25 billion in 2015 and 2016 due to the stronger dollar and competitive pressures.

Earnings per share, which were $5.59 in 2013, dropped to $4.85 in 2014 and are expected by Goldman Sachs to remain at about that level in 2015 before recovering to $5.23 in 2016.

One Competitor Stands Out

Occasionally a new concept arrives on the scene that captures consumers' imaginations and makes a splash: and that's SHAK. If it successfully executes its aggressive growth model, MCD could find it harder and harder to lure in new customers.

SHAK isn't MCD's only competitor of course.

In fact, what's disturbing is how tough the competitive environment is getting. It may not be a burger joint, but Chipotle Mexican Grill Inc. (NYSE: CMG) is giving MCD competitive fits.

In early February, CMG stock declined by $50 per share after disappointing investors by only reporting 16% same-store sales growth.

Most restaurants would kill for that kind of growth, but when you are trading at more than 50x earnings, investors push away from the table if you serve up anything less than a perfect meal. At the end of 2014, CMG operated 1,755 restaurants throughout the United States. Each of those restaurants is valued at about $12 million.

CMG stock has been a moon-shot over the past five years, rising sevenfold during that period as the company has expanded its footprint and redefined the fast-food dining space (which has been re-christened the "casual" dining space by Wall Street analysts).

CMG is a great company, and every bit a competitor to MCD, but its growth is destined to slow.  Its stock is very expensive and a dangerous investment at current prices.

At the same time, CMG's success is going to be very difficult for SHAK to replicate.

At 4.5x sales and 100x earnings, the average restaurant is valued at $25 million, which makes SHAK among the most expensive restaurants in the world. Its stock is also very expensive and a highly speculative investment at current prices.

SHAK stock didn't skyrocket on its own merits. Rather, investors convinced themselves that it will become another CMG. It also has a two-class ownership structure that severely limits shareholder rights in this age of enlightened corporate governance, but when investors are fighting for burgers and fries, principles be damned.

CMG remains a more formidable threat but MCD's U.S. same-store sales are still trending slightly positive. The real weakness has been in Asian/Middle Eastern/African markets, where same-store sales were down over 12% partly due to supply problems in China and Japan. The company was also hit by the effects of the strong dollar since it derives a significant percentage of its sales outside the United States.

MCD is certainly a mixed bag. It's problems don't appear to be easily solved, however given its size, scope, and still superior financial muscle, MCD can certainly be counted on to serve its gazillionth customer sometime this decade.

However, the question for us is whether MCD's stock price is still the rock-solid investment it's always seemed.

The Best Alternative to MCD

In view of the company's recent underperformance, it would not be surprising to see McDonald's attract the attention of a serious activist shareholder.

The company is a huge cash generator and returned $6.4 billion to shareholders last year through share buybacks and dividends. The company has targeted $18-$20 billion of capital that it plans to return to its owners in 2014-16.

MCD remains a solid dividend aristocrat, raising dividends in every year since initiating its first payout in October 1987.

That train will inevitably continue to chug along, but with a payout ratio of 67% and profit growth slowing, it's possible increases will turn paltry.

Unfortunately, a 3.5% dividend may be about all of the return investors can expect unless management identifies and builds out the company's strengths.

CMG looks like the better play.

Source :http://moneymorning.com/2015/02/17/which-player-to-back-in-the-fast-food-wars/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules