Would You Like Stock With That?

This time around, we turn our wandering eye to the world of fast food. The downturn of the economy has hit the restaurant economy the same as the other sectors of private business. Chain restaurants such as Bennigan’s have closed down several stores, and even the mighty Starbucks has closed down 600 of their stores.

The Exceptions To The Rule

Interestingly, this trend hasn’t spread to the fast food sector. The McDonald’s Corporation has gotten the most news in this category, rising from $57.32 per share at the beginning of July to $65.67. This builds on McDonald’s growth from the beginning of 2008, but more significantly, it builds on a five-year period of growth that really took off in mid-2006.

While the media has focused on McDonald’s, they’ve let a few other fast food corporations go unexamined that you may want to consider buying. Yum! Brands is a company that owns three major restaurant chains—Kentucky Fried Chicken, Pizza Hut and Taco Bell. This company has seen growth over the past few years that is comparable to McDonalds, although McDonald’s has seen stronger growth for the past couple months. Nonetheless, with a $38.68 price tag per share, it is strong performer in the fast food industry. Yum! Stock has consistently risen in value since 2003, and the trend shows no signs of stopping.

Another fast food company that is prospering despite the economy is Burger King International. Even though their stock price is sitting at roughly half of McDonalds’ value at $30.31 per share, it has been steadily climbing ever since it nosedived back in mid-2006! Since October 2007, Burger King’s stock has fluctuated between $20 and $30 dollars a share, and its been constantly rising over the past year. Granted, Burger King International doesn’t have the strong performance of McDonald’s stock, but it’s performed solidly for the past couple of years, and the lower price point is also appealing if you’re looking for a cheaper stock in which to invest. It’s a lot like buying a Ford Focus instead of a Corvette.

CKE Restaurants, the owner of Hardees and Carl Jr. restaurants, is also performing solidly, if not spectacularly. Their stock is slowly edging up from the fall it took in 2007 from $22.95 a share down to $12.80 at the beginning of 2008. Currently, it’s at $13.70.  It’s still managing to do well in an economic downturn, but it’s definitely a weak alternative to Burger King, Yum! and McDonald’s.

The Exceptions To The Exception

Wendy’s International, on the other hand, has been much less fortunate. From 2003 to 2006, its stock was showing some strong growth, gradually approaching its zenith of $67 per share in late September before crashing to about half that in early October. Since then, its stock has steadily declined, until now its stock hovers around $23 per share. Personally, I’d like to recommend this stock. It’s shown that its potential rivals McDonald’s, but since 2006 it has just continued to decline. If you’re feeling risky, you might want to pick up some shares and see what happens, but otherwise stay away.

Why has Wendy’s suffered when McDonalds and Burger King have thrived? Part of the reason is that Wendy’s has stagnated in the area of menu improvement. It dropped its latest innovation, Frescata deli sandwiches, with little fanfare, and ever since has relied on their old standards. Another reason may be the company’s commodity costs. While Wendy’s second quarter revenue was down slightly from last year, it got hit with $11 million in commodity expenses that it didn’t have last year. Wendy’s also decided to revamp their menu, adding some breakfast items, and the low stock price may just be the result of bad timing. Whatever the reason, Wendy’s International is set to merge with another fast food corporation, Triarc.  You best know them for their Arby’s restaurants.

Quite frankly, Triarc could use the help. Their stock has been in a tailspin since 2007, and its price has fallen from the modest $8.68 per share it had in January to just $5.83 per share in August. This quarter, it posted a loss of almost $7 million. At least it’s only a quarter of the loss it posted last year!  If there’s a bright spot here at all, it’s that the Arby’s and Wendy’s franchises are both strong in areas their counterpart lacks. Arby’s consistently tries out new menu items, such as their deli sandwiches, and has no problem creating variations on a theme. Wendy’s, on the other hand, has one of the best value menus in the fast food business, a feature missing from the Arby’s menu.  The combination might work, but combining two ailing companies in order to make one solid corporation isn’t a sure-fire solution. Of course, at six dollars a share, this stock is hardly what you could call high-risk.  I’d buy this stock over Wendy’s, but only because when I’m risking money I like to minimize the potential failure.

Chris Gottschalk
Analyst, Bourbon & Bayonets