A recent survey by the National Restaurant Association revealed that the Restaurant Performance Index (RPI) was 101.0 in April; the highest in the last 10 months. There have been companies like Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) that have been consistently rewarding its shareholders. According to the National Restaurant Association, as much as 41% of the restaurant operators are expected to see an increase in their sales in the later part of this fiscal year. The National Restaurant Association estimates a 3.8% (year over year) increase in total restaurant sales to $660.5 billion in 2013. I have selected 3 restaurant companies- Starbucks Corporation (NASDAQ:SBUX), Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) – all of which have great potentials for long term gains.
What makes Starbucks a solid investment?
Business expansion plans-
This Seattle based company has over 18,000 outlets in more than 62 countries. Apart from offering high quality coffee in its outlets, Starbucks Corporation (NASDAQ:SBUX) has been venturing into new business segments-tea, juice, packaged meals, etc. In 2010, it acquired Evolution Fresh juice brand. Earlier in 2012, it acquired La Boulange Bakery Brand to increase its food offerings. It completed the acquisition of Atlanta-based Teavana Holdings towards the end of the fiscal year 2012. This $620 million cash deal makes the 300 unit Teavana retail chain a wholly owned subsidiary of Starbucks Corporation (NASDAQ:SBUX). It aims to “re-invent the way the world enjoys tea.” It also plans to add tea bars to Teavana stores which will serve handcrafted beverages.
An addition to its business expansion plans is- it plans to serve coffee in European offices as well. The idea is to set up coffee bars in offices across Europe, where employees can have Starbucks Corporation (NASDAQ:SBUX)-coffee from the vending machines installed. This business plan spreads across France, Germany, Austria, Denmark and Finland.
Impressive earnings and valuation-
After being hit by recession, Starbucks Corporation (NASDAQ:SBUX) has been recovering well. For the last fiscal year, it reported company-wide same store sales of around 7%. Its sales in the Asian region has been impressive-a whopping 15%. Starbucks Corporation (NASDAQ:SBUX) is trading at a P/E ratio (ttm) of 33.64. Even though it might look a little over-valued with regard to its P/E multiple, with a quarterly growth rate of 11 percent, it is surely a solid investment. The strong earnings growth rate is also supported by a strong balance sheet. It has debt-equity ratio of only 10 percent. Moreover, it is trading at a price to sales ratio of 3.52-as compared to the industry average of 8.44- giving it a lot of scope to grow. The company has also revised its full fiscal year EPS target to $2.12-2.18 from the previous target of $2.05-2.15.
Why Yum! Brand is yummy for the portfolio?
With over 39000 stores, Yum! Brands, Inc. (NYSE:YUM) is the largest chain of fast food restaurant in the world. It operates in more than 125 countries- KFC, Pizza Hut, Taco Bell being some of its brand names. Even though the sales growth in China has been slow, out of the $13.6 billion sales last year-China contributed around 51 percent of the sales.
Currently Yum! Brands, Inc. (NYSE:YUM) has a dividend yield of 2%. With a payout ratio of only 40%, it has great potential to increase its dividends- making it a great dividend stock. Analysts have predicted a growth of 11.69% for the next 5 fiscal years. The Chinese market provides excellent opportunity for long-term growth and the company has plans to increase the number of outlets in China. With solid expansion plans and strong growth forecasts, I am definitely bullish on Yum! Brands, Inc. (NYSE:YUM) stock.
McDonald’s- I am loving it!
McDonald’s Corporation (NYSE:MCD) has always been one of my favorite stock. With more than 35000 stores in 120 countries, it is the leader in the fast food industry. It recorded global sales increase of 2.6% as compared to the 1.9% predicted by Wall Street analysts. It is currently trading at a P/E ratio (ttm) of 18.25-well below the industry standard of 21.68. A value investor would be attracted towards McDonald’s Corporation (NYSE:MCD) stock. McDonald’s Corporation (NYSE:MCD) has always rewarded its shareholders. Currently paying a dividend yield of 3.1%-McDonald’s has increased its dividend payout since 1976. With the new menu offerings doing wonders for the company, a solid track record of dividend payouts and with a great potential to expand its business in uncovered regions like China, I am loving this stock.
Foolish Bottom Line-
With the U.S. restaurant industry looking good-all the three stocks mentioned above offer solid growth potentials. I am bullish on all the three stocks. Eat up the solid forecasts of all the three stocks to make your portfolio fat!
The article 3 Restuarants You Must Buy! originally appeared on Fool.com and is written by aastha jhunjhunwala.
aastha jhunjhunwala has no position in any stocks mentioned. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s and Starbucks. aastha is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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