The number one burger joint in the world has been a gross underperformer over the last few years, but investors shouldn’t let that keep them from owning other industry players.
Everyone loves McDonald’s (NYSE: MCD).
Okay, maybe not everyone loves to eat the there, but Wall Street and many retail investors love to own the stock. But why?
It could be its rather juicy 3.6% dividend yield and 37 consecutive years of annual dividend payment increases.
However, even factoring in its dividend, McDonald’s has disappointed investors.
Over the last two years, its total return, which includes dividend payments and stock appreciation, is just 9.5%.
Meanwhile, Jack in the Box Inc. (NASDAQ: JACK) is up 150%, Burger King Worldwide Inc (NYSE: BKW) up 117% and The Wendy’s Co(NASDAQ: WEN) has returned 102%.
Granted, the entire fast food industry has been feeling the shift toward healthier alternatives, But McDonald’s gross underperformance could be related to its own business.
It’s having health safety issues in China and saw the closure of five of its restaurants in Russia by the food safety authorities.
McDonald’s has also dominated the breakfast market for some time. However, competition is rising here, from both eat-at-home (think: Greek yogurt and protein packed granola bars) and fast food companies like Taco Bell.
Americans still love their burgers. Just because McDonald’s is proving to be a “dead money” investment there are three burger joint stocks that investors should own besides McDonald’s:
No. 1: The Wendy’s Co
This fast food company has activist investor Nelson Peltz’s Trian Partners as a major shareholder — owning nearly 18% of the company. He’s the activist pushing for PepsiCo (NYSE: PEP) to split its snack and beverage businesses.
Wendy’s still lacks a meaningful international presence, which could be a key growth opportunity going forward. As well, Wendy’s has been remodeling stores in an effort to attract more customers. And although its dividend isn’t as great as McDonald’s, its 2.5% yield is still enticing.
No. 2: Burger King Worldwide Inc
Burger King also has a major hedge fund owner, with Bill Ackman’s Pershing Square owning 10% of the company. The big news of late for Burger King is its purchase of the Canadian coffee shop Tim Hortons Inc. (NYSE: THI).
In a rare move, Morgan Stanley recently upgraded Burger King to overweight while downgrading the beloved McDonald’s to equalweight. The logical reason being that the Burger King-Tim Hortons combination makes Burger King a formidable foe in the fast food industry.
The two will operate as standalone brands, but the new company will be domiciled in Canada, which means a lower tax rate. About half of Burger King’s stores are located outside the U.S., leaving a big opportunity for tax savings.
Burger King offers the lowest dividend yield of the burger joints listed, coming in at 1%.
No. 3: Jack in the Box Inc.
When it comes to Jack in the Box, well you might not know Jack. Most people know Jack in the Box for its infamous commercials starring Jack Box. Or for being able to order anything on the menu at any time of the day. Its menu includes not just burgers, but everything from tacos to eggrolls.
But what you might not know is that Jack in the Box owns Chipotle (NYSE: CMG) wannabe, Qdoba. My colleague Chris Preston put Chipotle on the Wyatt Research readers radar last month, calling it the only fast food stock to own.
One of the big issues for Jack in the Box is that Qdoba is getting crushed by Chipotle. However, that creates a big opportunities for Jack in the Box to spinoff Qdoba.
That could be a big positive, allowing the company to operate as a pure-play burger joint. But it would also allow Jack in the Box to trade at a higher valuation, removing what’s known as a conglomerate discount. Jack also offers a 1.2% dividend yield
All three of the burger joints trade at a P/E (price-to-earnings) ratio that’s higher than McDonald’s. But when you factor in Wall Street’s earnings growth expectations, each one has a lower P/E-to-growth rate (PEG) ratio that’s below McDonald’s.
Granted, McDonald’s slogan is “I’m lovin it,” but maybe you shouldn’t be lovin’ the stock. The company is getting just too big to meaningfully grow.
Rather, investors looking for exposure to core fast food industry should take a look at one of the three underdog burger joints above.
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