Recently, I had an opportunity to watch the 2004 documentary “Super Size Me” made by American filmmaker Morgan Spurlock. If you’re not familiar with it, it’s about the influence of food chains, namely McDonald’s Corporation (NYSE/MCD), on the massive obesity rates in America and the superlative rise in the obesity rate globally with the expansion of fast food restaurants. The movie reminded me not only about how unhealthy fast foods generally are, but also about the strategic thinking used by McDonald’s in driving the demand for the “golden arch.” Note that I’m just using McDonald’s as the example as it was the focus of the film.
You always know you are near a McDonald’s, as it’s easily recognizable by the iconic big yellow golden arches that can be spotted a mile away. There are over 33,000 restaurants in 119 countries, including the U.S., Canada, Europe, China, the Asia-Pacific, the Middle East, and Africa. The film indicated there were around 80 McDonald’s outlets located just in Manhattan. And that was in 2004 when the film was released. If you to want know the top U.S. fast food restaurants in China, read The Three Top Restaurant Stocks in China.
I’m not here to judge the film and its attack on the fast food industry; the film does tell us how well the McDonald’s brand has done worldwide, which is backed up by my stock analysis.
McDonald’s has been a top performer in the restaurant sector over the past decade after the company made a dramatic shift in its menu offering to include healthy meals and broaden its target market. While there are clearly healthier foods on the menu, the demand continues to be largely for the burgers, chicken nuggets, fries, and soda.
My stock analysis shows that the strategy shift worked, as McDonald’s is at the top of the fast food chain, leaving Burger King and The Wendy’s Company (NASDAQ/WEN) in its dust.
You could have picked up a share of McDonald’s for below $8.00 in 1990 or at the $14.00 level in 2003 before the current nine-year bullish technical trend in the stock.
At the current level, my stock analysis is that the top growth has been discounted into the price of the shares, but you can still play the growth of McDonald’s. The best way to do this may be through opportunities in the Latin America region; for example through Arcos Dorados Holdings Inc. (NYSE/ARCO), the largest McDonald’s franchisee in the world based on system-wide sales and number of restaurants. Note that the shares mentioned should not be construed as a recommendation to buy, but are only for illustrative purposes.
Arcos Dorados operates or franchises 1,840 McDonald’s-branded restaurants in 20 Latin American and Caribbean countries and territories. Trading at $14.06 as of the close of June 18, 2012, the stock is down 52% from its 52-week high of $29.43. The stock has vastly underperformed McDonald’s since October 2011, according to my stock analysis.
In my stock analysis, there is a mispricing of Arcos Dorados in the marketplace, probably due to the fact the stores are situated in Latin America.
Take a look at the comparative revenue growth between the two stocks based on my stock analysis. McDonald’s is estimated by analysts to grow its revenues by 2.3% in 2012, followed by 5.5% in 2013. At Arcos Dorados, revenues are estimated by five analysts to increase 9.3% to $4.0 billion in 2012, followed by 13.9% growth to an estimated $4.6 billion in 2013. These are superior growth rates based on my stock analysis.
The price/earnings to growth (PEG) ratio, the multiple compared to the estimated five-year annual earnings growth rate, is a handy stock analysis tool for comparing the stocks. McDonald’s has a PEG of 1.64, versus the more attractive PEG of 0.90 assigned to Arcos Dorados.
While McDonald’s has been on an impressive upward trajectory, my stock analysis suggests that Arcos Dorados represents a potentially more rewarding risk-reward situation.