Which Fast-Food Stock Will Be The Next McDonald’s? A Surprising Conclusion
McDonald’s (MCD) is one of the greatest American success stories ever. Its burgers and French fries still seem tasty to me. And its stock has been a winner for so long, it defies reason. Our data only goes back to 1990, but it shows that even late in its life, McDonald’s stock has generated total returns (including dividends) that beat that of the S&P 500.
But McDonald’s earnings are expected to rise just 1 percent this year. Naturally, investors are wondering, as they seem to every decade or so, whether the company’s extraordinary run is over.
It’s a fair question: Which stock is the next McDonald’s? Is there a fast-food stock you can buy cheap now and hold for the next thirty years?
The two superstars in the restaurant sector are Seattle-based Starbuck’s (SBUX) and Denver-based Chipotle Mexican Grill (CMG). They’re both low-debt, steady-growth outfits. Trouble is, everybody knows it, so the market has priced huge growth into their shares already. Their PE ratios are significantly higher than McDonald’s.
There are some other fast-food stocks whose PE ratios are more nearly in line with that of McDonald’s: fast-casual restaurateur Cheesecake Factory (CAKE), based in Calabasas Hills, Calif., drive-in chain Sonic (SONC), of Oklahoma City, and hot dog purveyor Nathan’s Famous (NATH), based in Jericho, N.Y all have PE ratios more nearly in line with McDonald’s.
But each of them has problems. Sonic is highly leveraged, and its revenues per share stumbled big-time after 2008.
Cheesecake Factory’s sales have outpaced McDonald’s…
Unfortunately, Cheesecake Factory hasn’t been very good at converting its impressive sales growth into impressive earnings growth.
Tiny Nathan’s Famous, a century-old hot dog purveyor with a market cap of just $126 million, has had impressive sales growth over the past decade…
But Nathan’s has had a contract dispute with its largest licensee, SMG. A judge in Chicago ruled in 2010 that Nathan’s could not terminate SMG’s license to make and package its goods and ordered Nathan’s to pay nearly $5 million in damages. Nathan’s is appealing the ruling, but the judgment was a big blow to its earnings.
So which stock do you bet on? Do you buy one of the cheap outfits in hopes that it finds its footing and becomes the next McDonald’s? Or do you set aside your qualms about the high price of buying quality chains like Chipotle and Starbucks?
Me, I’d stick with McDonald’s. But I’d reinvest the company’s dividends into shares of Starbucks and Chipotle, just in case.
Stephane Fitch is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis