With the “Image Activation” initiative, company executives have reported an average 25% increase in revenue at stores that have already undergone the renovations. That indicates there will be further growth in sales as the company continues to transform all of its current restaurants by 2015 (the company’s goal). However, the firm is balancing those increased sales with losses from stores that are closed due to remodeling.
With the “Right Price, Right Size” initiative, the company is for the first time adding a value menu (other than their Triple Stack for $2 during a brief period). Most other fast-food chains have had a value menu for a long time, and this has helped them be relatively recession proof. I think the new value menu will help protect The Wendy’s Company (NASDAQ:WEN) investors from recessions. However, I would hold out in owning this stock until 2015, when all the stores are expected to be remodeled. The expenses associated with the renovations will be felt until around that time, and will damage profits.
Burger King has too much debt to grow
Burger King Worldwide Inc (NYSE:BKW)’s PE ratio is relatively high right now at around 51. The firm announced a $200 million stock buyback and that has driven up the price. Even with the buyback, which would lower the PE ratio, it is still very expensive. Furthermore, the firm has about $3 billion of long-term debt, which equates to a debt to equity ratio of nearly 2.5. Not good in an industry where cash is needed to grow.
Where to invest
McDonald’s Corporation (NYSE:MCD) has continued to impress me with its business savvy and ability to profit from an increasing global middle class. The firm has also improved its image with healthier menu items and a classier ambiance in the restaurant. However, the cost of the improvements have lowered the return on assets considerably, and makes the company overpriced. The Wendy’s Company (NASDAQ:WEN) is in a similar boat, but the improvements there have raked in healthy profits. The same can’t be said for Burger King Worldwide Inc (NYSE:BKW), which doesn’t have operating expenses under control, and has too much debt to make any major improvements to its stores. I’d put my money with The Wendy’s Company (NASDAQ:WEN) for the long term. The company could experienced lower profits in the next two years due to the many renovations, but after that, I see major growth ahead.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald’s. The Motley Fool owns shares of McDonald’s.
The article Which of These 3 Fast Food Chains Should You Own? originally appeared on Fool.com.
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