Burger Wars: How to Invest in the Fast Food Industry

You should have at least one fast food stock in your portfolio.fast-food-industry
There’s a reason why fast food industry is ubiquitous – the demand has always been there, and always will be there.  Sure, it will fluctuate from time to time, but in the long-run, there will always be people who buy fast food just like there will always be people who buy gasoline (and coffee), even in the face of minimum wage scares.
Just as gasoline will never be undone by the “greenies”, the fast food industry will never be undone by the “healthies.”  So that’s why I think you should have at least one fast food stock in your portfolio.
But which one?
In the old days, I would have said McDonald’s (NYSE:MCD) hands-down.  Yet the venerable chain is going through some growing pains, while smaller players have turned around and are gaining market share.
Let’s examine the hard numbers and then see if the results should be tweaked by more qualitative considerations.  Other than McDonald’s, we’ll look at Burger King Worldwide (NYSE:BKW), Wendy’s (NYSE:WEN), and Jack in the Box (NASDAQ:JACK)
You can examine lots of different metrics, but I chose these because they tell the most important tale as far as the state of companies.
Nobody appears to be in big trouble from a balance sheet standpoint.  JACK is struggling, however.  It’s low on cash and not generating a lot of free cash flow.   The fact that it trades at a P/E on par or above its peers, especially on such weak profit margins doesn’t impress me.  I cross JACK right off the list.
Wendy’s is also undergoing a turnaround.  It doesn’t seem to be incredibly effective, although strides are definitely being made.  It has a much better cash position than JACK, is able to service its debt, and is getting free cash flow churned out.  Still, it has really weak margins and, again, trades at too high a price to be considered.
Between McDonald’s and Burger King, well, look at the metrics. The turnaround at Burger King isn’t just going well, it appears to be on fire.  The company’s 33-year-old CEO has made some pretty drastic changes, especially in cutting corporate overhead.  The fact that Burger King is blowing away everyone with its margins is what is so impressive.
It appears to be expecting far more robust EPS growth than MCD.  It trades at a higher P/E but a much lower PEG.  It has plenty of cash on hand, can service its debt, and its free cash flow is terrific.  The margins are where the company blows away all rivals.
I think McDonald’s has the benefit of brand name and size, along with a decent yield, and that will attract income investors.  However, I think you want to be in Burger King stock.  Clearly the CEO knows what he’s doing, and the growth prospects here vastly outstrip all rivals.
So I put the King on the throne of the Burger Wars.

Market Cap 93.46B 9.28B 2.99B 2.3B
TTM Operating Margin 30.12% 56.60% 8.30% 11.25%
TTM Profit Margin 19.48% 24.38% 3.73% 4.41%
Forward P/E 15.48 23.5 21 21
Long term EPS Growth 3.24% 15.83% 13.63% 15.40%
5 yr. PEG 2.72 1.77 1.73 1.59
Dividend 3.20% 1.10% 2.30% 1.30%
Cash on hand 4B 863MM 456MM 9MM
Long Term debt 13.8B 2.94B 1.42B 498MM
TTM FCF 4.6B 350MM 74MM 54MM

Lawrence Meyers does not own shares of any company mentioned.

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