Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

The Secret to Success in the Fast Food Sector

Wednesday, March 27th, 2013
By for Profit Confidential

Secret to SuccessMcDonalds Corporation (NYSE/MCD), a bellwether for the fast food industry, recently hit a barrier after coming in short on its earnings in both the second and third quarters. But the maker of the “Big Mac” came back and beat the Thomson Financial consensus earnings-per-share (EPS) estimate in the fourth quarter. Like many of the fast food stocks, McDonalds has been feeling the pinch globally, seeing some pulling back in spending, especially in China and domestically. Or perhaps, consumers are becoming more health conscious and want to avoid fast foods, which is something McDonalds has acknowledged, as it’s working to deliver a healthier menu.

My stock analysis suggests that McDonalds has been the top performer in the restaurant sector over the past decade after the company made a dramatic shift in its menu to include an assortment of healthy meals to broaden its target market.

The stock chart of McDonalds below shows the company’s incredible and steady run since 2004 compared to the S&P 500, represented by the red line on the top of the chart, based on my technical analysis. McDonalds traded at a 52-week high on March 15, 2013.

MCD McDonalds Corp Stock chart

Chart courtesy of www.StockCharts.com

This strategy shift worked, as McDonalds continues to be at the top of the fast food chain and the “Best of Breed,” leaving Burger King Worldwide, Inc. (NYSE/BKW) and The Wendys Company (NASDAQ/WEN) behind, according to my stock analysis.

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McDonalds’ comparable same-store sales in Europe fell 0.5% in February, which is not great. However, given the financial crisis over there, the numbers were not bad, based on my stock analysis, especially considering that same-store sales declined a much worse 3.3% in the U.S. market and 1.6% in the Asia-Pacific, Middle East, and African markets.

And based on my stock analysis, there’s a growing list of rivals that all have targeted McDonalds as the company to emulate in an attempt to take away its market share. But I doubt they will be able to knock McDonalds off its perch.

In the key and growing China fast food market, McDonalds operates about 1,500 stores (aiming for 2,000 by 2013), but my stock analysis indicates that the company faces tough competition from YUM! Brands (NYSE/YUM)—the operator of many well-known fast food outlets, such as Taco Bell, Kentucky Fried Chicken (KFC), and Pizza Hut. YUM! is hesitating on the chart after reporting some stalling in sales, especially in its key and growing Chinese market. Based on my stock analysis, the lack of healthier alternatives on its stores’ menus is one reason for this stalling. The biggest challenge for McDonalds in China could be Burger King, which announced it would open up 1,000 restaurants in China within five years. Again, a challenge, but I doubt the “Whopper” will overtake the Big Mac, based on my stock analysis.

YUM Yum Brands Inc Stock market chart

Chart courtesy of www.StockCharts.com

So until there’s a real challenge, McDonalds will continue to be the top fast food stock to own. The company has proven it for the past 10 years, and nothing will change, according to my stock analysis.

Read about a good risk-to-reward travel stock in “Play the Travel Space with This Former Highflier.”

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  • Greg Smith

    Burger King will never be McDonalds, especially when they serve instant coffee and greasy croissants for breakfast Yuk.

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles

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