5 competitors, 5 strategies

The "next McDonald's" we're looking for won't look exactly like the one we have. Many of its rivals offer a different slant on fast food -- just as McDonald's reinvented fast food and franchising. One trend that's been growing in recent years is fast casual. You enter and order your food, which is prepared while you wait.

The financial game plans are different. Yum has a small dividend; Sonic, Jack in the Box, Chipotle and Red Robin don't offer dividends as yet.

Here's a look at our five contenders:

Yum Brands (YUM). While McDonald's shares are down this year, Yum's shares are up about 22%. The company owns the KFC, Taco Bell and Pizza Hut chains and is making a huge and, so far, successful effort to be a major player in China. It has 38,000 restaurants already, mostly franchised, and is betting that its mix of chicken, Mexican food and pizza will succeed in Asia. There's ample room for growth, and while each brand has had problems over the years, all have improved in terms of image and quality.

Still, those brands aren't exactly new and different, so they could be a tough sell if consumers say "been there, done that." If China's economy truly falls apart, so will Yum shares.

Jack in the Box (JACK). A storied name, Jack remains a small, mostly West Coast chain. The stock has been a pretty good performer, up 20% to $25.10 this year, but it has fallen 12.5% since mid-September when the overall market peaked. It has two lines of business -- Jack in the Box and the Qdoba chain, which offers fast-casual Mexican food.

Like Yum, it faces a potentially nagging problem in that its brand is already well-known. But the smaller footprint eases that worry.

Plus, the company has a lot of real estate, and, wrote Charles Sizemore of the Sizemore Investment Letter recently, Qdoba has the potential to grow quickly, capitalizing on consumer demands for fresher foods.

Sonic (SONC). A classic drive-in burger chain, complete with carhops, the Oklahoma City company is smallish: only 3,500 stores, 88% franchise-owned. Revenue is less than $600 million a year. The stock, however, has been a winner so far this year, up nearly 38%. It's been digging itself out of a hole caused by the recession and a reputation as the poor man's McDonald's. It has growth prospects in the Northeast and northern Midwest and on the West Coast.

A warning, though: Volatility goes with these shares. They fell 74% between November 2007 and November 2008. They've ranged from $6.50 to $12 or so ever since. Analyst Paul Westra of Cowen & Co. thinks the chain is more vulnerable to the economy than others. Size is an issue. It also has a heavy 8-to-1 debt-to-equity ratio.

Chipotle Mexican Grill (CMG). This fast-casual chain offers burritos and tacos. It grew from 16 restaurants when McDonald's bought into the company in 1998 to more than 500 when McDonald's sold its position in 2006. It has 1,200 locations in the United States, Canada and the United Kingdom. It is just starting to roll out a new concept: ShopHouse Southeast Asian Kitchen, featuring serving bowls and banh mi sandwiches

Here are the rubs:

  • The company's comparable-store sales were up only 4.8% in the third quarter, compared with 8.3% for the first nine months and 11.3% a year ago.
  • The company expects less robust growth for the fourth quarter and flat-to-low single-digit growth in 2013.

The stock jumped 1,020% between November 2008 and early April -- but has fallen 41% to as low as $233 before rebounding back to $275. It has lots of cash to finance new growth: nearly $410 million at the end of the third quarter. It has no debt. If you're interested, watch the stock's chart carefully for a bottom -- you want to go in at a relatively low price.

There are plenty of growth opportunities in Europe and Canada for Chipotle stores. It may get an additional boost if the Asian kitchen business works.

Red Robin Gourmet Burgers (RRGB). Founded in Seattle, the Denver-based company has 463 full-service restaurants (331 are company-owned) concentrating on burgers and a few other entrees, plenty of fries and a full-service bar. On a Friday night, you'll find families celebrating birthdays on one side of the restaurant and couples enjoying a modestly priced night out on other.

The company saw revenue slip 3.2% in fiscal 2008 as the financial crisis hit and profit slid. Business rebounded in 2010 and 2011 and looks poised to finish 2012 with revenue approaching $950 million. The stock is up nearly 13% this year and up 250% from its bottom in November 2008.

Red Robin has lots of room to grow. Most of its restaurants are in the Western United States, British Columbia and Alberta. The company is carefully expanding into the Southeast and into the Northeast.

It is also experimenting with a fast-casual service concept. A number of analysts are watching to see how its Red Robin Burger Works concept fares. These basically offer burgers, fries and desserts that are cooked on the spot, much like Qdoba or Chipotle. They require less space to operate and are able to serve customers quickly. Red Robin has opened five -- four in the Denver area and a fifth near Ohio State University in Columbus. Four more are expected to open in the fiscal fourth quarter.

Take Jack in the Box and Red Robin

McDonald's has three advantages over all these companies: Size, brand and a 3.6% dividend. The cautious investor will still find these shares attractive. The company, however, does face increasingly intense competition from just about everyone from Burger King and Wendy's to Chipotle, Panera Bread (PNRA) and Starbucks, Lazard Capital analyst Matthew DiFrisco wrote Monday as he cut his rating on the stock to "neutral" from "buy."

So if you're looking for equally solid returns and better growth in the next few years, the best bets look like Jack in the Box and, especially, Red Robin. The other three have bigger question marks to go with their possibilities.

Jack in the Box is in the midst of what appears to be a successful turnaround, with a new brand -- Qdoba -- providing additional growth. Red Robin looks to have a solid strategy that appears to weather economic stress well, and its Burger Works looks to be an innovation with potential.

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