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.)

IN PICTURES: World's Greatest Investors

Others Trying To Move Up
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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis article, risk free!

Related Articles
  1. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  4. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  5. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  6. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  8. Investing Basics

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Technical Indicators

    Key Financial Ratios to Analyze the Mining Industry

    Discover some the most important financial ratios used by investors and analysts to evaluate companies in the metals and mining industry.
RELATED TERMS
  1. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  5. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  6. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!