Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

How You Can Beat the Cyclicality in the Restaurant Industry

Page 1 of 2

After a weak 2012, the restaurant industry seems to be recuperating. Lower food-cost inflation, growing same-store sales (mainly on the back of extra value-for-price initiatives) and international expansion boosted the industry’s prospects for the year.

Actually, the National Restaurant Association expects a 3.8% year-over-year increase in total restaurant sales to $660.5 billion this year. In this context, I will take a look at Tim Hortons Inc. (USA) (NYSE:THI)Yum! Brands, Inc. (NYSE:YUM) and Darden Restaurants, Inc. (NYSE:DRI) in order to evaluate whether or not they stand as good long-term investment opportunities.

Tim Hortons Inc. (USA) (NYSE:THI)

Canadian value
Tim Hortons is the largest quick-service restaurant chain in Canada, with a market capitalization of $8.6 billion. Growth prospects for the company abound, not only in Canada but also in the U.S. and other international markets where the penetration potential is substantial.

In Canada, Tim Hortons benefits from its scale and its front-runner position in the industry. These features allow it to use leverage on suppliers, access superior retail real estate, and make hefty investments in advertising.

In the U.S., the restaurant chain faces two big problems: limited brand awareness and strong competition from Dunkin Brands Group Inc (NASDAQ:DNKN). However, a combination of quality and value should help it make a name for itself and allow it to successfully compete with Dunkin. Furthermore, with double the market capitalization, scale advantages still favor Tim Hortons.

Going forward, its franchise-based business model (approximately 99% of Tim Hortons’ restaurants are operated by franchisees) will provide the company with the necessary cash and predictability to weather the cycles inherent in the industry.

The management has put in motion several initiatives to invigorate growth. These developments include changes in key managerial positions (including the designation of Marc Caira as president and CEO), and the incursion into some Middle Eastern markets like Kuwait, among others.

After experiencing a 3 week uptrend, Tim Hortons now trades at 22 times its earnings, a slight discount to the industry average. I should also highlight that Tim Hortons boasts a ROE of 35%, versus Starbucks‘ 28.7% and Dunkin’ Brands’ 23.2%.Moreover, Tim Hortons yields 1.8% of the current stock price in the form of dividends. With such a compelling value proposition, this is a stock to add to your long-term portfolio.

Yum! Brands is a yummy investment
Yum! Brands is a quick-food behemoth with more than $32 billion in market cap. As the owner of several category leading brands like KFC, Taco Bell and Pizza Hut, brand awareness is not a problem for Yum!. The fame of these names should help it expand into new markets and continue to establish its dominance in some of its main markets, especially in China.

In China, proven distribution infrastructure and local site development teams should make the expansion easier, according to Morningstar. In other mature markets, like the U.S., menu innovations and refranchising initiatives should lead to wider margins for the upcoming years.

Emerging economies also provide plenty of opportunities for expansion as urban populations, disposable incomes and young populations grow. Actually, analysts believe that 50,000 Yum! locations are possible by 2020, with major growth opportunities coming from India and Africa.

Yum! also enjoys of scale advantages, which help it bargain with suppliers, reducing costs considerably. Although margins are just respectable (good, but not great), returns on equity are astonishing. The company boasts a ROE of 65.4%, more than double the industry average.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!