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McDonald’s Corporation (MCD), Yum! Brands, Inc. (YUM): Fast Food, 3 Picks

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Competition among fast-food restaurants appears to be on the rise, with chains trying to increasingly differentiate themselves on the basis of price and product. On the other hand, factors such as changing eating habits in addition to volatile energy, food and labor costs could affect profitability. Moreover, most of these chains mainly operate through franchisees and restrictive credit markets could have a negative effect in the business.

Impressive performance

Domino’s Pizza, Inc. (NYSE:DPZ) operates as a pizza delivery business under three segments, with 90% of its domestic operations and the whole international business being franchised. The company is showing a strong international presence, with more than 70 consecutive quarters of positive same-store sales. Its international growth was higher than that of its closest peers, Pizza Hut and Papa John’s Int’l, Inc. (NASDAQ:PZZA).

Among the most lucrative initiatives are digital ordering, a new mobile application and the introduction of pan pizza, a category in which Pizza Hut has been the known the leader. On the downside, some of these initiatives caused costs to rise, which can limit its operating margins. Another factor for higher costs was higher cheese prices.

However, the second quarter’s balance sheet showed amazing figures, with an increase of 10.1% in revenue compared to the year-ago quarter and $0.57 in diluted earnings per share versus $0.47 last year. Moreover, Domino’s Pizza, Inc. (NYSE:DPZ) continued its shareholder friendly policy after repurchasing more than $40 million of its common stock and paying dividends, which during the two quarters of 2013 totaled $11.5 million.

The fact that all of the international business and 90% of domestic operations are franchised provides protection to earnings and hence increases earnings per share and the return on investment. Making investments safer in such a competitive industry always helps.

Are we loving it?

McDonald’s Corporation (NYSE:MCD) is one of the world’s most renowned brands with 34,600 restaurants in 120 countries. The greatest percentage of its locations are franchisees or affiliates and only 6,600 are company units.

McDonald’s second quarter showed moderate improvement compared to last year’s. The US is leading the positive momentum after a great response from consumers to the Egg White Delight sandwich and the premium chicken McWraps.

McDonalds (MCD)Credit: McDonald’s Corporation (NYSE:MCD)

On the other hand, sales in Europe, Asia/Pacific, Middle East and Africa declined. Global sales increased 1% while consolidated revenue advanced by 2%. Earnings per share increased by 5% as well, up to $1.38. Although figures do not look impressive, I feel confident that in the longer term, the company will be able to generate higher returns on invested capital. Consequently, the company continues its policy of buying back shares and distributing dividends.

I am impressed by the constant innovations in food and beverage made by McDonald’s Corporation (NYSE:MCD). In addition, more efficient kitchens and drive-through locations, free wireless Internet access and restaurant-decor upgrades should help McDonald’s ahead of the competition. A renewed emphasis on value-menu advertising seems to be helping increase customers as well.

The role of China

Yum! Brands, Inc. (NYSE:YUM) is the largest restaurant system in the world with a presence in more than 120 countries and almost 40,000 units. Its main concepts are KFC, Pizza Hut and Taco Bell.

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