Face-Off on Stocks: McDonald's, Yum, Wendy's/Arby's [Video]

McDonald's (MCD), a component of the Dow Jones Industrial Average ($INDU), posted solid fourth-quarter earnings on Jan. 25, but the market didn't show the world's biggest burger chain much love. True, fast-food restaurants appear to have put the worst of the downturn in consumer discretionary spending behind them, but new industrywide challenges have emerged for 2011. That got us wondering if there's fast money to be made in fast-food stocks -- or if shares are too hard to swallow at current levels.

McDonald's has an enviable track record of attracting customers with promotions and new products. Witness the most recent quarter, where earnings grew 2% on a 4% sales gain thanks to the McRib sandwich and the addition of Carmel Mocha to the McCafe lineup.

Shares are up about 18% over the last 52 weeks, outpacing the broader S&P 500 ($INX) by roughly a percentage point. Whether they can keep that pace remains to be seen. Like all fast-food companies, McDonald's is facing much higher food and energy costs heading through 2011, meaning the days of massive margin expansion are likely behind it.

There's also currency risk, given that so much of McDonald's revenue comes from overseas. On the other hand, risk-averse investors can take comfort in the stock's low volatility, and the 3.3% yield on the dividend is both generous and secure.

Long John Silver's Walks the Plank

Yum Brands (YUM), operator of KFC, Taco Bell and Pizza Hut, has gone gangbusters with global growth, especially in China. The stock is up more than 40% in the last year, and yet the dividend still yields better than 2%. The stock looks neither expensive nor cheap at current levels because it trades essentially in-line with its own five-year average on both a forward and trailing earnings basis. Yum is also streamlining its operations by selling off Long John Silver's and A&W root beer.

But like McDonald's, Yum is sensitive to rising food and energy costs, and well as foreign exchange headwinds. After outperforming the broader market by such a wide margin, investors might want to wait for a more attractive entry point.

Wendy's/Arby's (WEN) is throwing in the towel on its two-year experiment of leveraging both chains. The company is looking to sell Arby's, which has been a drag on overall results. Maybe that will make the stock take off, but it's a probably a speculative play, at best.

Wendy's positioning as a higher-quality chain has also meant higher costs. Furthermore, Wendy's/Arby's has been lagging peers throughout the recovery. The stock is essentially flat over the last 52 weeks, and the dividend yields just 1.7%. The company has no trailing price/earnings multiple, having racked up a net loss for the trailing 12 months. On a forward basis, the P/E stands at 30, which is a significant premium to it's own five-year average.

For more on the bull and bear cases for McDonald's, Yum Brands and Wendy's/Arby's, see Face-Off on Stocks above.


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