Look Out McDonalds!

I’m not a big eater of fast foods, but as a business, this market offers some good opportunities for investors, namely with the top three operators: McDonalds Corporation (NYSE/MCD), YUM! Brands, Inc. (NYSE/YUM!), and rising star Chipotle Mexican Grill, Inc. (NYSE/CMG). The mainstay in the group is McDonalds, but YUM!, comprising Taco Bell, Kentucky Fried Chicken (KFC), and Pizza Hut, offers investors a diversified fast food play. The upstart is Chipotle Mexican Grill, which offers superior growth rates; but this is already discounted in the stock’s higher valuation as compared to the other two companies.

A problem we are currently seeing is some slowing in fast food sales in markets outside of the United States, namely China in the case of McDonalds and YUM!, according to my stock analysis. YUM! is currently being investigated by several law firms, accusing the company of intentionally being overly optimistic of its recent growth in its key China market in order to drive its share price higher. Of course, YUM! subsequently disclosed that its poultry supplier is being investigated by the Chinese government on concerns about safety. (Source: “Shareholder Rights Law Firm Johnson & Weaver, LLP Announces Investigation of YUM! Brands, Inc.,” Business Wire, January 11, 2013, last accessed January 25, 2013.)

The same is occurring for McDonalds as far as its poultry suppliers. McDonalds, a bellwether for the fast food industry, is continuing to report stalling in its global same-store revenues after reporting a dismal 0.1% rise in the fourth quarter, compared to 3.1% for 2012. While the company beat the fourth-quarter revenues and earnings estimates, McDonalds warned that January will likely see a decline in a key sales reading. (Source: “McDonald’s profit edges up after focus on value,” Associated Press, January 23, 2013.) My stock analysis suggests that McDonalds is feeling the impact from Europe, from which the company derives about 40% of its system-wide revenues. Comparable sales in Europe declined 0.6% in the fourth quarter, which is not a surprise given the financial crisis over there, based on my stock analysis.

In my stock analysis, McDonalds remains tops in the fast food market; the company has been the top performer in the restaurant sector for the past decade, after the company made a dramatic shift in its menu to include healthy meals and value picks. (Read about my favorites in the discount retail sector in “From Discount to Big Box: Some Retailers to Watch.”) This shift in strategy worked, as McDonalds is top of the fast food chain at this juncture, leaving Burger King Worldwide, Inc. (NYSE/BKW) and The Wendys Company (NASDAQ/WEN) behind, according to my stock analysis.


Yet, based on my stock analysis, there’s a growing list of rivals that have all targeted McDonalds as the company to emulate and, in turn, take market share from.

In the key and growing China fast food market, my stock analysis suggests that McDonalds faces tough competition from YUM!, which opened its first KFC in China in 1987. Currently, YUM! operates about 3,700 KFCs in the country. The growth of KFC has been amazing, considering that the U.S. has about 5,200 KFCs; it looks like it will just a matter of time before there will be more KFCs in China, based on my stock analysis. The Pizza Hut brand is growing in China, too, with about 630 restaurants in over 120 cities.

In the U.S., my stock analysis indicates that McDonalds faces increasing competition from Chipotle Mexican Grill, which had been stellar, trading at a record $442.40 on April 13, 2012 before retrenching on growth concerns. Nonetheless, my stock analysis suggests Chipotle Mexican Grill is a real threat and a best stock play that can’t be ignored by McDonalds.