Investing in restaurants is not very different from choosing a place to eat–at the end of the day, the right decision depends on your personal taste. There are some objective measures of value, quality and growth to consider, and investors should pay close attention to these factors when analyzing investment alternatives. However, keeping these characteristics in mind, investment decisions need to be made in accordance with each investor´s targets, risk tolerance and overall investment strategy.
Value investors may prefer to play it safe, buying a company with a proven history of success and rock solid financial strength–in that case, McDonald’s Corporation (NYSE:MCD) is the way to go. The company may not be the most exciting growth story in the industry, but this mature fast food giant is trading at an attractive valuation and has a remarkable track record of dividend increases.
With more than 34,600 stores in 120 countries, the company is the undisputed leader in the global fast food industry. Geographical location is a key asset in this business, and McDonald’s Corporation (NYSE:MCD) has placed its restaurants in many of the most desirable locations in major cities worldwide.
The company´s massive size allows it to negotiate better prices and payment conditions with suppliers, and provides it with the resources to invest more in marketing and advertising than the competition. Besides, McDonald’s Corporation (NYSE:MCD) operates nearly 80% of its business via its franchise and affiliate system, which produces rents and royalties with minimal capital expenditures during challenging economic times.
The trend towards healthier eating habits is providing a challenge for McDonald’s Corporation (NYSE:MCD), but the company is adjusting its menu by offering more options with better nutritional qualities. McDonald’s Corporation (NYSE:MCD) pays a 3.1% dividend yield, and has raised its payments each and every year since 1976, so the company has proven that it can adapt and thrive under different conditions.
When it comes to Starbucks Corporation (NASDAQ:SBUX), there are some interesting parallels between the stock as an investment and the company´s products: both Starbucks Corporation (NASDAQ:SBUX) and its products are a bit pricey, but at the same time they both offer superior quality and some fairly unique characteristics.
Brand differentiation is a key advantage that allows Starbucks Corporation (NASDAQ:SBUX) to charge higher prices than the competition and generate superior profitability for its shareholders. Even if the US market is quite saturated, the company still has a lot of room for growth in international markets: Starbucks Corporation (NASDAQ:SBUX) plans to have over 1,500 stores in China by 2015, and the Asian country will become the company´s second largest market behind the US over the next couple of years.
Starbucks Corporation (NASDAQ:SBUX) is not afraid of innovating and expanding into different areas: Evolution Fresh, La Boulange, and Teavana are acquisitions that will provide plenty of growth opportunities for the company in the middle term. The company is also expanding into the consumer packaged goods business, and it’s doing quite well in that area thanks to its superior quality and brand presence.
At a P/E ratio above 35 Starbucks Corporation (NASDAQ:SBUX) doesn´t come cheap, but this is a high-quality company that is firing on all cylinders, so a premium valuation is well deserved.