11/27/2012 5:15 PM ET|
Buy the next McDonald's
The burger giant has delivered for investors for years, but there are signs its growth is stalling. Here are 5 competitors that could grow faster -- and the 2 best bets among them.
McDonald's. The name means burgers and fries, Chicken McNuggets and Egg McMuffins -- to almost everyone in the world.
McDonald's (MCD) also means a stock that jumped 148% in value between the end of 1999 and 2011, delivering for investors even in the worst of times. It was one of just two stocks in the Dow Jones Industrial Average ($INDU) that finished the horrible year of 2008 with a gain.
But the company has hit a wall in 2012. Consumers are wary in a difficult economy. And McDonald's is so big that it's hard to find enough growth to move the needle. That makes it time for investors to look for companies with similar positives and lots more room to grow -- giving them the potential to outperform the Golden Arches over the next few years.
I've found five with that potential: Jack in the Box (JACK), Sonic (SONC), Yum Brands (YUM), Chipotle Mexican Grill (CMG) and Red Robin Gourmet Burgers (RRGB). First we'll look at why McDonald's works -- then ask which of these five is most likely to grow into this "next McDonald's."
Why McDonald's is unique
First, we have to acknowledge McDonald's amazing position. The company has a market value of $84.4 billion, the most of any fast-food company and larger than its three largest competitors -- Starbucks (SBUX), Yum Brands and Chipotle Mexican Grill -- combined.
Some 69 million people a day buy a meal at any of 34,000 McDonald's restaurants in 119 countries -- nearly 48,000 sales a minute. In 2011, company-owned and franchised restaurants generated nearly $86 billion in food sales.
The company has boosted net income nearly 14% a year for the past five years. Dividends have grown 20% a year for five years. If you're happy with a reliable stock paying a 3.6% dividend yield, it's still a solid stock to own.
Sure, performance has been stagnant of late, with Europe a particular problem. The stock is down 14% this year, third-worst among the 30 Dow stocks. Same-store sales fell 1.8% in October, the first monthly decline in nine years. But McDonald's has worked through downturns before. In 2003, for example, shares dipped to the $14 range. They were a steal at that price: They now go for $86.
If you'd bought 100 shares of McDonald's when it went public in 1965 at $22.50 a share and didn't sell through 12 splits, your stake would have grown to 74,358 shares worth about $6.41 million. That's a gain of roughly 285,000%, or 18.4% a year. The total return is larger if you include dividends.
There are three keys to McDonald's success:
Foolproof formula for franchisees. McDonald's has achieved its bulk -- OK, prominence -- by providing its franchisees a nearly foolproof formula for success. Sites are carefully chosen and usually owned by the company, which gets a cut of rents as well as sales.
Menus and preparation processes are standardized. A vast network of suppliers sells the raw ingredients following strict standards.
The assembly-line system of food preparation -- first developed by founders Richard and Maurice McDonald in the 1940s and expanded by Ray Kroc, who started as a franchisee and later bought out the brothers -- ensures a Big Mac in Tours, France, is the same as one in Montgomery, Ala.,
Evolving with the times. Success brings envy, controversy -- and evolution.
In the 1990s, its franchisees, who own 81% of the restaurants, complained that the company was selling too many franchises. McDonald's has been hit with repeated charges that mass consumption of Big Macs, french fries and related fare from other chains was responsible for growing obesity rates. And to social critics abroad, its omnipresent, standardized fare has represented the worst in American culture.
But Mickey D's has adapted. Existing franchises are being modernized with renovated or rebuilt stores, some 900 in 2011 and 1,000 expected this year. To answer dietary critics, it has broadened its menus to offer wraps, salads and fruit; it now sells more chicken sandwiches than burgers. Because McDonald's saw Starbucks' rapid growth as a threat, it now offers the McCafé line of gourmet coffees. And it bends its menus overseas to local tastes.
Financial strength. McDonald's backs up its franchisees with the cash to make improvements to stores and, as important, amazing marketing. It is one of the 15 largest advertisers in the world, with a $2.3 billion advertising budget that dwarfs those of Subway, Burger King (BKW) and Wendy's (WEN).
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