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McDonald’s Corporation (MCD), The Wendy’s Co (WEN): Are These Two Stocks Overvalued?

If you are interested in investing in burger chains, McDonald’s Corporation (NYSE:MCD) and The Wendy’s Co (NASDAQ:WEN) are two obvious choices to start looking at. They are in remarkably different situations: the former is looking to milk new revenue segments after saturating domestic markets; the latter is looking to turnaround its business. Will they succeed? Below, I present my outlook on the two companies.

McDonalds (MCD)

Expansion is the key for McDonald’s

McDonald’s Corporation (NYSE:MCD) has been, for some time, thought of as “China growth” story. Currently, less than 3% of the profit comes from this emerging market, and there is a huge opportunity with Yum! Brands, Inc. (NYSE:YUM), the current leader, slowing down. However, the company has plenty of opportunities.

One opportunity comes in the form of targeting more middle-income Americans. To succeed in this, the firm is opening a new state-of-the-art restaurant in Maine, which is supposed to contain the newest interior and kitchen designs, and after months of revisions, it was finally approved. Other relatively classy McDonald’s Corporation (NYSE:MCD) joints have been opened elsewhere, such as in California. It’s an experience worth trying to shift away from the economy-dependent low-income demographic.

All in all, McDonald’s Corporation (NYSE:MCD) is one of few big companies that is constantly seeing a higher growth in sales and workforce. It is seen as a bellwether of the macro economy and has largely recovered since the October slip up. With various new growth opportunities from the creation of upper scale joints to penetration in China, the company can catalyze its growth beyond normal market rates.

My one concern is whether the stock is overpriced. At 18.4 times trailing earnings, it is slightly expensive compared to the current 17.2x PE multiple for the S&P 500. I also believe that the 9.8% growth rate expectation may be a bit too optimistic.

Expansion shouldn’t be taken for granted, especially when considering that new restaurant shops — like Buffalo Wild Wings (NASDAQ:BWLD), Chipotle, and Panera Bread Co (NASDAQ:PNRA) — are opening and spreading across the nation. Rising food costs are also eating into margins.

If you opt to invest in McDonald’s Corporation (NYSE:MCD), I encourage hedging it with a company that is on the verge of national expansion: Buffalo Wild Wings (NASDAQ:BWLD). Buffalo is projected for a 20%+ growth rate, and it is safe with 30% less volatility than the broader market. It has around 3% the number of restaurants that McDonald’s has, but around 3.8% the revenue. At such an early stage, Buffalo Wild Wings (NASDAQ:BWLD) is performing quite well with fewer restaurants.

Will innovation save Wendy’s?

Relatively recently in Las Vegas, two real estate investment groups bought out 18 Wendy’s locations for $23.7 million. While it’s not exactly exciting news, it’s certainly telling. This has been the general business strategy: (1) downsize the business and (2) yet market the company as a “premium” brand. These strategies are, of course, largely contradictory and illustrative of a company that is in decline.

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