The Best Fast Food Stock Now: Ranking The 6 Biggest U.S. Fast Food Stocks

Fast food stocks are popular in the investing community, as they have an easy-to-understand business model and most investors are well familiar with their restaurants. In this article, we will focus on the 6 largest fast food restaurant chains that are headquartered in the U.S. In order of market cap, these stocks are: McDonald’s (MCD), Yum Brands (YUM), Chipotle Mexican Grill (CMG), Domino’s Pizza (DPZ), Wendy’s (WEN) and Jack in the Box (JACK).

In general, fast-food chains have greatly rewarded their shareholders over the long term thanks to a series of growth drivers; opening of new stores, same-store sales growth, margin expansion and share repurchases. However, competition has greatly heated in this business in recent years and hence there have been huge differences in the returns of the above stocks. Therefore, investors should be particularly careful in the choices they make in this group of stocks, particularly given that some of these stocks have already priced a great portion of their future growth.

The main reason behind the lackluster dividend yields of this group of stocks is the fact that they have shifted their focus on executing aggressive share repurchases in recent years. As a result, most of these stocks have passed under the radar of income-oriented investors in recent years. However, investors should not underestimate the benefit from a steep decrease in the share count, which results in rising earnings per share and stock prices.

In this article, we will compare the expected 5-year returns of the six largest fast food stocks by summing their earnings-per-share growth, their dividends and their expected price-to-earnings expansion or contraction.

Fast Food Stock #6: Chipotle Mexican Grill

Chipotle Mexican Grill operates fast-casual, Mexican food restaurants throughout the U.S. It currently has more than 2,400 restaurants.

The company has suffered from a series of health safety incidents in the last three years, which caused the stock to plunge 67%, from its all-time high of $758 in 2015 to $250 early this year. Those incidents led the company replace its CEO with the CEO of Taco Bell. This change in the CEO position has proved a game changer for the company so far.

In Q1, Chipotle grew its same-store sales by 2.2% and its total sales by 7.4%. While the same-store sales growth resulted from a 4.9% hike in the menu prices and not from an improvement in traffic, the company exceeded the analysts’ estimates by 36% and thus it was rewarded with a 25% rally of its stock upon the announcement of its results.

Moreover, while its sales have recovered to their pre-crisis all-time high level, its operating margin is still less than half of its pre-crisis level, as it has plunged from 19.0% in 2015 to 6.7%. Therefore, there is still ample room for improvement.

The management expects to increase the store count by 6% this year and the same-store sales at a low single-digit rate. In addition, it is trying to reward its shareholders via share repurchases but the stock is trading at a pronouncedly high price-to-earnings ratio of 53.7, which renders the share buybacks inefficient. Overall, in the next five years, it is reasonable to assume 5% annual growth in the store count, 2% same-store sales growth, a 5% annual margin expansion and a 1% annual buyback rate for a total 13.0% average annual earnings-per-share growth.

On the other hand, the stock is now trading at an excessive price-to-earnings ratio of 53.7. As it is reasonable to expect this ratio to come down to 26.0, which will correspond to a PEG ratio of 2.0, the stock is likely to incur a 13.5% annualized contraction of its valuation multiple. Consequently, as this contraction will fully offset the earnings-per-share growth rate, the stock is likely to offer a -0.5% average annual return over the next five years. In other words, the market is so enthusiastic about the recovery of the stock that it has already priced its expected 5-year growth into the stock.

Fast Food Stock #5: Wendy’s

Wendy’s is the third largest hamburger quick-service restaurant chain in the world, with more than 6,600 restaurants in 28 countries and the U.S.

The company boasts of having grown its same-stores sales for 21 consecutive quarters and having posted rising or flat traffic share for 10 consecutive quarters.

WEN America

Source: Investor Presentation

Wendy’s is also growing its international same-store sales at a double-digit rate but these sales comprise only 4% of its total sales and hence the overall performance of the company is essentially determined by its North American segment.

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