McDonald’s Corporation (MCD), The Wendy’s Company (WEN): Fast Food Restaurant Is Cheaper Than its P/E Indicates

It can be difficult to find bargains in a rising market; investors who generally look for stocks trading at a discount to no-growth intrinsic value are forced to pay full price for stocks and bet on growth or sit on the sidelines as the market surges.

McDonald's Corporation (NYSE:MCD)

For investors who choose to stay invested despite a lack of compelling investment options, it is best to only pay for growth that is reasonably assured without the necessity of a thriving global economy.

McDonald’s Corporation (NYSE:MCD) is one company that offers investors such an opportunity. The company is the clear leader in the fast food industry but still has substantial growth opportunities in Latin America and China.

Not Afraid to Tweak Formula for Success

Over the years, McDonald’s Corporation (NYSE:MCD) has thrived due to its consistent offering, ownership of its real estate, and the strength of its employee training programs.

However, despite thriving due to those three general factors, the company has been unafraid to change some parts of its offering. For example, McDonald’s has recently renovated many of its restaurants and changed its marketing campaigns. In addition, relatively new premium products and specialty coffee have been a big success for the company.

McDonald’s Corporation (NYSE:MCD) continued success allows it to produce billions in free cash flow each year, which it uses to expand into new markets, namely Latin America.

No Switching Costs, but Competition Can’t Compete

Despite having virtually no switching costs, McDonald’s has been able to stay well ahead of its competitors. The Wendy’s Company (NASDAQ:WEN) has been unable to replicate McDonald’s success in introducing premium products to its menu. The company is also hoping that a renovation of its restaurants will meet the same success that McDonald’s renovation has had. However, The Wendy’s Company (NASDAQ:WEN) has never been able to establish the consistency in earnings and free cash flow that makes McDonald’s Corporation (NYSE:MCD) the industry leader.

Jack in the Box Inc. (NASDAQ:JACK) has had more success than The Wendy’s Company (NASDAQ:WEN), but is still far behind McDonald’s in terms of profitability. Its Jack in the Box restaurants have a long runway for growth in the United States, and its Qdoba brand is expanding as well. However, it too is unable to replicate McDonald’s high and steady margins.