McDonald’s Corporation (NYSE:MCD) same store sales rose more than expected in May, showing the fast-food giant deserves a little faith from investors. One month doesn’t make a trend, but don’t count this industry giant out.
Slowing Things Down
A key metric in the food industry is same store sales, or the sales at restaurants that have been open for at least a year. McDonald’s same store sales results have been weak of late in the US. Although the company’s growth is increasingly coming from developing markets, the burger joint’s core mature markets remain important. So any weakness is a concern.
However, McDonald’s Corporation (NYSE:MCD)s management is among the best in the restaurant industry. Part of that is a proactive effort to keep things changing. For example, growth in the last decade was largely fueled by new items. The new fare brought the company into areas like salad and coffee, where it either didn’t compete before or had limited offerings.
More recently, the company has been working to trim items from its menu since too many of the the new products stuck around. At the same time, it has been promoting the value of a McDonald’s Corporation (NYSE:MCD)’s meal. These efforts, among others, led to an impressive 2.4% jump in U.S. same store sales in May. Not surprisingly, the shares jumped on the news.
Market share is the big game in developed markets, and the competition is heating up. For example Chipotle Mexican Grill, Inc. (NYSE:CMG) has led a new wave of restaurants that offer a higher quality of fast food. Burger joints are part of the movement, too. These quick casual restaurants have taken market share from both below, as customers trade up, and above, as casual restaurants like Darden Restaurants, Inc. (NYSE:DRI)‘s Olive Garden and Red Lobster see customers choosing the lower cost fare.
The Old Guys
That’s on top of competition from existing companies like Yum! Brands, Inc. (NYSE:YUM) and Burger King Worldwide Inc (NYSE:BKW). Interestingly, The Wendy’s Company (NASDAQ:WEN) has probably seen the most impact from the higher quality fast food, forcing the company to up its game.
The Wendy’s Company (NASDAQ:WEN) has long positioned itself as offering fresher and higher quality meals than other fast-food burger places. But that claim, and stale restaurants, didn’t hold up after the quick casual trend picked up steam. The barely profitable company is trying to right the ship but is best avoided by all but the most aggressive turnaround investors.
While management is on the right track, too many corporate actions over the last few years have left the company in a weakened state and the brand image isn’t what it used to be. The risks outweigh the potential benefits.
Back to the Giant
This is where McDonald’s Corporation (NYSE:MCD)’s business has shined. The company is boring, does one thing, and does it well. Although sales dipped during the recession, they have since headed higher again. Earnings, meanwhile, only fell once in the last decade (2007) and dividends have been increased on an annual basis each year.
With a solid industry position in mature markets, a proactive management team, and expansion in emerging nations, McDonald’s Corporation (NYSE:MCD) is a good option for conservative investors seeking a mixture of growth and income. The shares recently yielded 3.1%.
While it’s important to keep an eye on McDonald’s same store sales numbers, they are far less of a concern than this same metric at a company like Chipotle. While the food quality at the Mexican themed restaurant may be wonderful, it’s a new concept in a crowded field supported by often fickle customers.
The company’s top and bottom lines have grown rapidly, but have come off of a small base and have been fueled by store openings. Such investments often captivate investors, leading to swift stock price ascents. However, once results begin to slow, which is inevitable as a company grows, investors will eventually decide it isn’t worth a premium valuation and jump ship.
For example, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s trailing price to earnings ratio is around 40 versus McDonald’s 18. While recent growth suggests that’s a reasonable P/E, it won’t be if growth slows. This isn’t an issue to shrug off. Chipotle’s shares ran up to over $400 in the middle of 2012 and then quickly fell to below $240 by late October of that year. They have resumed their upward move and now sit at around $360 or so.
The Big Guy
McDonald’s Corporation (NYSE:MCD) is a good option for conservative growth and income investors because of its size, focus, and long history of success. The company may not be an exciting stock to own, but it is a reliable one if you give management the time it needs to steer the ship. Chipotle, on the other hand, isn’t boring. However, it is most appropriate for momentum investors and those willing to watch closely for the time when sales eventually start to weaken.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article A Restaurant Leader for a Reason originally appeared on Fool.com and is written by Reuben Brewer.
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