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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Who can afford fast food .? It will kill you too.

January 28 2011 at 4:46 PM Report abuse rate up rate down Reply

I am so sick of these pessimistic GOPers with their "do nothing"attitude. You sit there bashing Obama for every move he makes or attempts to make; every recommendation he presents to Congress and then you turn around and add to that that HE is spending. When are you going to get a clue? The President DOES NOT SPEND WHAT CONGRESS DOES NOT APPROPRIATE! Now, whether you want to admit it or not, President Obama inherited the worst financial situation this country has seen since the Great Depression. That situation was created, in large part, by a Republican president named George W. Bush, Jr. and a Congress controlled by Republicans. Now, admittedly, Obama ran on the idea that he would do everything possible to correct the trajectory of the ill-guided rocket launched by the Bush cronies. He never said that he would solve every problem in the flash of an eye. In order to accomplish anything positive to solve some of the issues facing this country, the government MUST cooperate in a bipartisan spirit...at ALL times. That simply is not going to happen when you have two powerful, dominating political groups constantly trying to gain control and power from one another. Why cooperate with the enemy? Government is like a mom and dad who can't agree on how to raise the kids. There will never be a real plan..there will never be any real solutions..and in the final analysis what you have is two separate governing bodies bouncing off each other and trying to make the other one look like the bad guy. Get a clue here please. The system is flawed and always has been. But, the real difference now is that the money is bigger, the power is stronger, and the rewards are more lucrative. Consequently, the desire to seize that power is greater than at any time in our nation's history. Now, if you can come up with a really good solution to that problem, then you may well be on the way to truly addressing the problems on this country.

January 27 2011 at 4:48 PM Report abuse rate up rate down Reply

Since Wendy's changed the fries and the beef. It is terrible. I even had a free meal when I complained and it was incorrect and sucked. Mcdonalds hires teenagers and the quality sucks. Arby is not what it was 20 years ago. All Pizza places are down on quality. Eat at home less dissapointment.

January 27 2011 at 2:24 PM Report abuse rate up rate down Reply

i don't know why arby's is struggling. for this consumer, they hit all the spots.
5.95 deal, constant coupons, and their upscale deli market sandwiches now and then. the curly fries if you like them are not availabe anywhere else for a burger, makes little difference for me whether it is mcd's, wendy's or rally's. going to miss them if they go. liked hardee's, too but no longer any local stores.

January 27 2011 at 1:48 PM Report abuse rate up rate down Reply

If you want a REAL fried fish sandwich go to Captain D's and get their Classic Fish Sandwich. This in my mind is the best fish sandwich around for $2.99. The Burger King and McDonalds sandwiches are made up from stamped out processed fish and they are not in the same league as a non-processed fish fillet sandwich. McDonalds have the best menu for burgers but not for chicken. Ground up and pressed out chicken does NOT make a good sandwich.

January 27 2011 at 11:29 AM Report abuse rate up rate down Reply

You know what guys, I recently retired, and do not now have to eat ALL my meals out. I went home and made myself a peanut butter and jelly sandwich. WOW, this is so much better than anything I have eaten in years in any of these so called fast food joints. I even fried my own eggs, just the way I like them. Great! The eggs came from a local farmer, and I do not have to worry about getting some type of food poisoning. This is real living and eating!

January 27 2011 at 9:55 AM Report abuse +2 rate up rate down Reply
1 reply to stlowlife2's comment

stlowife2.....you need to get out of the house more often.

January 27 2011 at 10:17 AM Report abuse +1 rate up rate down Reply

Dear Yum Brands, in the even more unlikely event you are still reading this, I also think small drive-thru, pick-up only Fish & Chips restaurants would do well. You can walk in or drive-thru. Fast, easy and reasonable initial investment!

January 27 2011 at 9:18 AM Report abuse +2 rate up rate down Reply

Dear Yum Brands, In the unlikely even you are reading this, I say "Don't let the door hitcha'" to Long John Silver's. Now what? A fast-food restaurant that specializes in British-style Fish & Chips! If done right, it would be money. Local, national and International money. You could even put out a few Fish & Chips food trucks. People all over the world love fried fish, and Long John Silver's barely counted. McDonald's McFilet Sandwich doesn't count at all. I'm not aware of any fast-food outlets specializing in this opportunity, which I might add means nothing, and I believe the market is there.

January 27 2011 at 9:12 AM Report abuse +1 rate up rate down Reply
Robert & Lisa

The evil, ultra rich are deceiving you. Our socialist public educational system has indoctrinated our children into believing capitalism and freedom is bad and socialism is good. If Socialism is so good, why does the long time socialist government of Mexico boast of being the #1 producer of silver, plenty of oil, and the richest man in the world, yet 99% of their people are in the poverty level making an average of less than 6 dollars a day. Corruption is rampant. The evil, ultra rich see Mexico and want to implement socialism here, where they can have all of the wealth and power and the middle class will now be among the poor. That is what their Demoncrat puppets in the white house and senate are doing to us.

January 27 2011 at 4:19 AM Report abuse +4 rate up rate down Reply
1 reply to Robert & Lisa's comment

You are just PATHETIC.

January 27 2011 at 11:30 AM Report abuse rate up rate down Reply