Up to a few years ago, one of my top go-to fast food stocks was McDonalds Corporation (NYSE/MCD)…but that was then. The entire fast food restaurant market has changed. We have seen a marked shift in what consumers want and that is fresh and healthier meals, not greasy burgers and fries.
That’s why a restaurant stock like YUM! Brands, Inc. (NYSE/YUM), the operator of KFC and Taco Bell, has seen its business decline in the U.S. and its key market in China. Very few consumers want a 1,500-calorie, fat-laden, bacon-wrapped, deep-fried chicken burger any more.
In the case of McDonald’s, though, the same thing that helped propel its turnaround years ago, after it shifted to healthier meal options, is now hurting the company. While McDonald’s answered diners’ demands and offered healthier meals, there are now many more choices for a quick, healthy bite.
In November, McDonald’s reported continued weakness in sales after recording a 2.2% decline in its key global comparable sales. The same metric saw a horrible 4.6% decline at home. Consumers in Europe, Asia, the Middle East, and Africa all stepped away from McDonald’s.
As far as restaurant stocks go, I’m no longer positive on McDonald’s and feel the company has a long road ahead of it in its efforts to turn things around and entice diners to come back to its golden arches. McDonald’s said it would improve its marketing and simplify its menu, but I don’t think these moves will be sufficient enough to halt the slide in sales.
The reality is that McDonald’s continued to focus on its burgers and fries—and that was its downfall.
Two Restaurant Stocks I Favor Over McDonald’s
The big killer of McDonald’s, and my go-to among restaurant stocks now, is Chipotle Mexican Grill, Inc. (NYSE/CMG), which has been the hottest restaurant stock over the past several years. The restaurant’s food is healthy and wholesome—just what consumers want.
Since declining to the mid-$200.00 level in October 2013, I have favored this restaurant stock as a great example of what a good buying opportunity may look like. Chipotle is now trading above $650.00 and has a market cap of just over $20.0 billion. (This is still less than 25% of the $88.0-billion value of McDonald’s, though, as shown by the green line in the chart below.)
Chart courtesy of www.StockCharts.com
In the third quarter, Chipotle beat the consensus earnings-per-share (EPS) estimate by a whopping $0.31 per diluted share on more than $1.08 billion in quarterly revenues, up 31.1% year-over-year. The key comparable restaurant sales metric rose a staggering 19.8%. Revenues are slated to rise 27.9% this year to $4.11 billion, followed by growth of 17.2% to $4.82 billion in 2015, according to Thomson Financial.
The growth metrics at Chipotle are impressive, and I expect them to continue as the company grows its footprint, which will be needed to sustain the growth of this restaurant stock.
An alternative small-cap contrarian restaurant stock that has decent prospects is Noodles & Company (NASDAQ/NDLS), a provider of noodle and pasta dishes. The stock is below its high of $49.75 in October 2013 and its initial public offering (IPO) price of $32.00 in June 2013. Note the reversal on the chart below.
Chart courtesy of www.StockCharts.com
Noodles & Company is in aggressive growth mode and currently operates 425 locations system-wide across 30 states as of September 30. In 2014, management wants 2,500 stores! This may be heightened enthusiasm or wishful thinking, but the growth metrics are decent and well above those of McDonald’s. Noodles & Company is estimated to grow its revenues by 15.4% to $405 million this year, followed by 17.3% to nearly $472 million next year, according to Thomson Financial.