This is the first in what will be a series of posts about the restaurant industry. Today we will focus on classic, cheap burger chains: McDonald’s Corporation (NYSE:MCD), The Wendy’s Co (NASDAQ:WEN), and Burger King Worldwide Inc (NYSE:BKW). While all three chains make an argument for future profitability, given the uncertainty of the market I’m inclined to go with the restaurant that has proven its ability to provide value to investors and run a sustainable business model. My conclusion is this: avoid Wendy’s, consider Burger King, and invest in McDonald’s. Let’s take a look at the metrics.
The Wendy’s Co (NASDAQ:WEN) saw a 1% quarter-over-quarter increase in corporate same-store sales for the first quarter of 2013, which compared favorably to the McDonald’s Corporation (NYSE:MCD) global same-store sales decrease of roughly 1% and the Burger King Worldwide Inc (NYSE:BKW) corporate same-store sales decrease of 2%.
Management’s first quarter 2013 earnings call raised company adjusted earnings per share (EPS) guidance to $.20 to $.22 for 2013, which would be an increase from the 2012 EPS of $.17 per share. Management’s guidance would indicate a forward price to earnings (P/E) ratio of between 27 and 30, assuming a stock price of around $6. That seems a little pricey for a company that has seen flat-to-declining revenue historically ($3.4 billion in 2010 declined to $2.4 billion in 2011, with a rise to $2.5 billion for the trailing twelve months, according to Morningstar).
The new dividend of $0.04 per share is a good sign that management is serious about returning value to shareholders, but given the high payout ratio — 72% assuming annual EPS clocks in at $0.22 — it may not be sustainable. Then again, the dividend may also be a sign that management feels very bullish about the company’s long-term outlook and may have a good reason to think that EPS will steadily increase and reduce the payout ratio.
Personally, I don’t buy it. The stock is too pricey given past performance, and the dividend is suspect. If it grows revenue and the dividend for a couple of years, the stock should be reconsidered, but for a value stock I wouldn’t pay 30 times forward earnings.
The first thing that leaps out to me about Burger King Worldwide Inc (NYSE:BKW) is its debt to equity ratio, which is 2.5 according to Morningstar. When compared to McDonald’s 0.8 and The Wendy’s Co (NASDAQ:WEN) 0.7, it’s a big red flag. The Wendy’s Co (NASDAQ:WEN) and McDonald’s have an easier ability to expand through additional debt but Burger King Worldwide Inc (NYSE:BKW) is already pretty leveraged. The aforementioned drop in same-store sales is also concerning. On the revenue front, the chain is definitely healthier, with adjusted EPS of $.17 for the first quarter of 2013 ($.10 per share according to EPS calculated according to generally accepted accounting practices, or GAAP). According to NASDAQ, the consensus EPS forecast is $0.81 for 2013, which works out to a forward P/E of approximately 25, assuming a share price of $20.
Management announced a dividend hike to $.06 per share and a $200 million share repurchase program during the first quarter earnings call, which shows optimism regarding the stock. The dividend’s payout ratio is under 50%, so I would not be surprised to see it rise further — especially given that the dividend is up 50% since the fourth quarter of 2012.