Jack in the Box Inc. (JACK), McDonald’s Corporation (MCD), Chipotle Mexican Grill, Inc. (CMG): Why This Fast Food Chain is in Danger

There are plenty of better alternatives

In the hamburger business, I believe McDonald’s Corporation (NYSE:MCD) is the best alternative. According to the latest top regional quick service restaurants ranking by number of in-store visitors in the U.S., McDonald’s ranked first in every region. It’s vast amount of resources and ability to be constantly changing its menu are some of its main competitive advantages.

Reference: Stocktwits

As a stock, McDonald’s Corporation (NYSE:MCD) also has plenty of benefits. First, it has a more attractive price-to-earnings ratio. Then, it has increased its dividend in each of the last 35 years. Finally, it is one of the safest stocks in the world, because it owns more than 40% of the land and 70% of the buildings for its restaurants, and because it has one of the strongest brands in the globe.

In the Mexican food business, Chipotle Mexican Grill, Inc. (NYSE:CMG) is one of the strongest competitors. The company is growing way faster than Qdoba: in the latest quarter, revenue and operating income grew 18.2% and 9.4% respectively, opened 44 new stores and provided great guidance: it will open another 165-180 new stores for 2013.

But even Chipotle is finding it hard to keep margins stable. The latest earnings report showed a decrease in restaurant operating margin of 1.6% compared with the same quarter a year ago. The official explanation relates the margin decrease to exogenous factors like price increases in salsa and chicken. At any rate, the fact that both Qdoba and Chipotle could not offset the negative effect of cost increases with menu price increases shows that achieving pricing power in this segment is extremely challenging for any party.

Final foolish thoughts

To become a bear, it’s probably enough to recognize that Jack in the Box Inc. (NASDAQ:JACK) isn’t growing and its margins remain very low. In the latest quarter, margins were as low as to produce negative EPS. Such a pattern indicates that the company lacks competitive advantages and pricing power in a highly competitive industry. Therefore, it is more vulnerable to rises in commodity prices and to competitors.

Deceleration in revenue growth rates, possible saturation in the hamburger market and the absence of pricing power in the Mexican food segment could cause the stock price to drop further in the short run. In this context, McDonald’s Corporation (NYSE:MCD) and Chipotle are some alternatives to Jack in the Box that are totally worth exploring.

The article Why This Fast Food Chain is in Danger originally appeared on Fool.com and is written by Adrian Campos.

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s. 

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