McDonald’s (NYSE:MCD) and Restaurant Brands International (NYSE:QSR) have delivered strong earnings growth over the last few years, which has led both stocks to outperform the broader market averages. Recent sell-offs, however, are giving investors a good opportunity to add shares of these restaurant stocks to their portfolios. And that could make sense as both are on the offensive and capturing more spending from consumers who want better value and quicker service.
Mickey D’s has still got it
In 2017, the Golden Arches stood tall over what was a very difficult consumer spending environment for restaurants as a whole. Comparable-store sales grew 5.3% last year driven by the best comparable-guest count growth in five years. The bottom-line performance was also impressive, with earnings per share growing 17% over 2016 — the result of good cost management and share repurchases.
Image source: McDonald’s.
McDonald’s is in the process of refranchising some of its restaurants, and that led to a 7% decline in total sales. But this will lead to significant cost savings going forward and help management reach its goal of expanding operating margin from the current 38% to the mid-40% level.
In addition to refranchising, McDonald’s is in the process of completely transforming its brand image, and that starts with remodeling restaurants to give them a fresh, contemporary look. The company is also finding success with mobile ordering and delivery.Throw strong marketing and the right mixture of value and premium menu items on top of these initiatives, and the iconic restaurant brand is once again on the rise.
Investors have taken notice, with the stock trading as of this writing for 24 times trailing earnings. McDonald’s also pays shareholders a generous dividend yield of 2.5%.As the company begins to introduce mobile ordering and delivery across its 37,000 restaurants worldwide, restaurant traffic should continue to grow, which means it’s not too late to add this tasty stock to your portfolio.
Image source: Restaurant Brands International.
Building a fast-food empire
McDonald’s should be a relatively safe and steady restaurant stock, but if you have an appetite for even more growth, Restaurant Brands International (RBI) might be for you. RBI is the parent owner of Burger King, Tim Horton’s, and Popeye’s Louisiana Kitchen, and these chains have a lot of potential for international growth. Additionally, shareholders get one of the best industry operators in 3G Capital which, along with Warren Buffett’s Berkshire Hathaway, owns a controlling stake in the company.
RBI is doing a lot of the same things McDonald’s is to drive growth: implementing better marketing, introducing new menu items, beginning to offer mobile ordering, and simply running more profitable restaurants.In fact, the folks at 3G Capital are well-known for their method of stripping out excess costs in order to improve margins. We can see this playing out in RBI’s adjusted earnings growth of 33% in 2017, which followed 45% in 2016. This is while systemwide sales have been growing in the single-digit range.
Consistent with the way 3G Capital likes to do things, RBI management is on a mission to dominate the global fast-food market, and one of the ways it is doing that is through good old-fashioned deal-making. Burger King was acquired by 3G in 2010 and has been producing consistent low-to-mid single-digit comparable-store sales growth over the last five years.
Canada-based Tim Horton’s was acquired in 2015 and Popeye’s joined the RBI family last year. These smaller chains haven’t performed as well, but that’s a result of these brands being primarily based in North America, which has been experiencing a soft consumer spending environment lately.As a result of these spending trends, Popeye’s and Tim Horton’s suffered negative comps in 2017 of 1.5% and 0.1%, respectively. Longer term, these smaller chains should outgrow their dependence on the North American market as management opens new restaurants around the world.
RBI recently announced plans to launch Popeye’s in Brazil, and Tim Horton’s is launching in Asia, Europe, and Latin America.Management also continues to see growth opportunities for Burger King in the U.S., as well as globally.
The stock trades as of this writing for 27 times trailing earnings — a little more expensive than McDonald’s, which likely reflects the higher growth expectations investors have for the company. With plenty of international expansion opportunities, and with long-term-focused investors like 3G and Berkshire Hathaway influencing the direction of the company, RBI should deliver market-beating returns for shareholders over the long haul.