Fast Food Stocks In Review

By Greg Sushinsky | December 24, 2009 AAA

No matter how you measure it, McDonald's (NYSE:MCD) continues to be the flagship of the fleet of fast food restaurants. The golden arches continued its earnings growth through the recession and it is expected to finish the year well, despite challenges in the economy and heavy competition in the fast food space. The company should end 2009 with $3.96 earnings per share, an 8% increase over last year's EPS; it is projected to earn $4.41 next year. With a long-term growth rate projected at 9.4%, selling at a multiple of around 15, McDonald's is still strong. (To learn more about EPS, read Types Of EPS and Assess Shareholder Wealth With EPS.)

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Burger King (NYSE:BKC), quietly residing in the number two slot of fast food giants, sells for a slightly lower P/E ratio of around 12 times earnings. In addition, it continues to turn in decent profits with opportunities to solidify its position behind McDonald's. Wendy's/Arby's (NYSE:WEN), recently created when Triarc, which owned Arby's, bought Wendy's, has found business to be slightly better at Wendy's than at Arby's. But both have had problems with declining sales. Wendy's has been rumored to have an interest in purchasing donut chain Krispy Kreme (NYSE:KKD), but it might make more sense for Wendy's/Arby's to tighten up its own ship first.

Because the fast food space remains crowded, there are stragglers in terms of business performance. Jack In The Box (Nasdaq:JACK) had a mixed year with discouraging operational earnings. The company, in the process of re-franchising its stores, put out guidance that suggests sales will be off further in 2010.

Things To Watch For
Long-term investors will want to gauge not only the earnings trajectory, P/E ratios and other fundamental measures, but also the all-important business prospects for any company going forward. When you look at the major fast food restaurants, it's easy to see that the recession has presented a mixed bag, with giants McDonald's and Burger King performing nicely, but some of the others like Wendy's/Arby's and Jack In The Box not faring so well. Investors also should remember that the balance sheets tell some tales. Yum! Brands (NYSE:YUM), with its Pizza Hut and Taco Bell restaurants, sports a healthy EPS of $2.21 and has traded at around 15 times earnings. However, it also has a long-term debt-to-equity ratio of 3.6, which is less than ideal. McDonald's debt-to-equity ratio, for example, fares better - at about 0.81. Yet, Yum! Brands also generates $1.15 billion in cash flow, so its debt load of nearly $3.3 billion is not out of bounds. Thus, it pays to note underlying financials, even for strong companies. Yum! Brands is still projected to produce strong earnings growth going forward.

A Look Ahead
After digesting the year many of the fast food companies have had, it is easy to see that some of the stocks, such as McDonald's, are ending the year at virtually the same stock price that they began. (McDonald's stock dipped in March, but came back in the subsequent market rally.) But these stocks are not necessarily considered fast-growers, unless some catalyst makes a stock or the group of stocks take off. With Wendy's/Arby's and Jack In The Box still working through problems into 2010, and with the economy still soft, the business of fast food doesn't look as though it will be particularly robust. Still, some of these stocks - at the right price (McDonald's) - can be very profitable long-term holdings.

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