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The Reason Fast-food Stocks Should Be Amongst Your Top Picks

Companies / Sector Analysis Oct 04, 2012 - 10:57 AM GMT

By: InvestmentContrarian


The Reason Fast-food Stocks Should Be Amongst Your Top PicksChipotle Mexican Grill, Inc. (NYSE/CMG) is one of my favorite places to grab a quick bite to eat. Yet, despite some stellar growth, the stock broke below $300.00 on Wednesday and has been steadily losing ground since trading at a 52-week high of $442.40 in April. Mounting concerns regarding future growth and multiple downgrades from analysts have hurt the stock. Hedge fund manager David Einhorn hammered another nail into the coffin when he said that Chipotle’s valuation “doesn’t make sense.”

With Chipotle Mexican trading at 28X 2013 earnings and with a price/earnings-to-growth (PEG) ratio of 1.7, my stock analysis is that the current valuation looks somewhat top-heavy.

According to my stock analysis, there are strong showings in the restaurant sector, especially in the fast-food area. A staggering 30% of the 96,000 new jobs generated in August were driven by the food-services sector, according to data from the U.S. Department of Labor.

The Bloomberg U.S. Quick Service Restaurant Index, which includes Yum! Brands, Inc. (NYSE/YUM) and McDonalds Corporation (NYSE/MCD), is up over 22% for the year to October 3.

Whether it’s eating out or cooking at home, the investment opportunity for food-related stocks is excellent, especially with the fast-food stocks, based on my stock analysis.

At the top of the fast-food chain, according to my stock analysis, is McDonalds, with over 33,000 restaurants in 119 countries, including sizzling growth in China. It plans to have 2,000 restaurants in place in China by 2013. Based on my stock analysis, McDonalds has been a top performer in the restaurant sector over the past decade after making a dramatic shift in its menu to include healthy meals and to broaden its target market. My stock analysis shows that the strategy has worked, vaulting McDonalds to the top of the fast-food chain and leaving Burger King Worldwide, Inc. (NYSE/BKW) and The Wendys Company (NASDAQ/WEN) behind.

If you are looking for U.S. restaurant stocks that have a dominant position not only domestically, but also in China—the fastest growing market for fast foods—there are three major best stocks that are deserving of a look and addition to your portfolio, based on my stock analysis.

I have already covered the first stock: McDonalds. You cannot go wrong with McDonalds.

My stock analysis is that the second best stock and the top restaurant stock in China is Yum!—the operator of such well-known fast food outlets Taco Bell, Kentucky Fried Chicken (KFC), and Pizza Hut.

The company has close to 4,500 restaurants in 700 cities in China, adding a record 656 in 2011 and planning to add another 700 this year. In 2011, Yum! generated $908 million in operating profits from its Chinese outlets. According to the company’s web site, Yum! considers China to be the greatest restaurant opportunity of the 21st century. At present, about 40% of the company’s profits are generated in that country.

Yum! opened its first KFC in China in 1987 and recently opened its 4,000th. The growth of KFC has been amazing, considering that the U.S. has about 5,200 KFCs; so it looks like it is just a matter of time before there will be more KFCs in China than in the U.S.

Yum!’s Pizza Hut brand was launched in 1990 and is also growing in China, with about 630 restaurants in over 120 cities.

The third up-and-coming player in China’s restaurant sector, according to my stock analysis, is Starbucks Corporation (NASDAQ/SBUX), which is reporting strong business in spite of its later start. The company has over 570 stores in China, with lofty plans of 1,500 outlets by 2015. My stock analysis shows me that Starbucks has excellent potential, based on the possibility of the Chinese shifting their drinking preference from tea to coffee.


By George Leong

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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