Many people take advantage of restaurants, but where I live, we don’t have many. Yes, of course we have the typical fast food restaurants like McDonald’s Corporation (NYSE:MCD) and the occasional sit-down chain. Just a couple years ago did my town receive the blessing of Chipotle Mexican Grill, Inc. (NYSE:CMG). I say a blessing because there were lines out the door, around the building, and on to the street for the first two weeks. Putting my small, irrelevant town aside, what major restaurants out there look to be successful investments moving forward?
Growth
Chipotle Mexican Grill, Inc. (NYSE:CMG) has exploded in the past several years, there is no doubt about it. In fact, they are expected to open an additional 180 stores throughout the year. Believe me, if those stores have the same response that my local one did, the company will do very well. But there is competition. Some people think Chipotle is far too expensive, others think it’s cheap for what you get. I think that is a matter of opinion. The fact of the matter is, competition exists.
For those looking for a cheaper alternative, McDonald’s Corporation (NYSE:MCD) fills that need. Does it provide quality food? Most would answer that question with a resounding “NO!” That certainly doesn’t stop the worlds largest chain of fast food hamburger restaurants from serving 68 million people daily. In fact, the chain is home to more than 34,000 locations worldwide, adding over 2,000 of these since 2010.
If one of my local buddies wanted something a little different, he may have to drive 35 minutes to find it. There is not a local Panera Bread Co (NASDAQ:PNRA) where I am from, but that doesn’t mean they aren’t growing. The company was founded in 1981 and now has nearly 1,700 stores in 44 states and Canada.
Dividend opportunities
Do not exist for two of these companies. Currently, neither Chipotle Mexican Grill, Inc. (NYSE:CMG) or Panera Bread Co (NASDAQ:PNRA) offer any payouts to their shareholders. McDonald’s Corporation (NYSE:MCD) on the other hand has a history that few can compare to. For 25 consecutive years the company has increased its dividends and currently holds a dividend yield of 3.1%. The same year that Oklahoma City Thunder forward Kevin Durant was born is the same year that McDonald’s started this track record. This history makes it a S&P 500 dividend aristocrat. Starting in 2008, dividends started being paid quarterly.
Valuation
Pricing is an important aspect to any restaurant, but having the right price can lead to great success. So how cheap/expensive are these companies to investors?
I don’t think it is unreasonable to think that the average person could easily spend $10 at any of these restaurants for a meal. It might be a little more difficult at McDonald’s Corporation (NYSE:MCD), but could certainly be done. Norway is home to the most expensive McDonald’s chain in the world, but customers there average $23 USD per transaction. In fact, a Big Mac sandwich costs Norwegians $7.06 USD compared to just $4.33 in America. Point being, one meal a day ($10) at any of these restaurants equates to nearly $3,700 in food every year.
If you think that is expensive, wait until you see the cost of these stocks. With Chipotle Mexican Grill, Inc. (NYSE:CMG), Panera Bread Co (NASDAQ:PNRA), and McDonald’s Corporation (NYSE:MCD) showing P/Es of 40.3, 30.6, and 18.5 respectively, investors may not be seeing much of a bargain. Despite revenues increasing annually for more than a decade, Panera and Chipotle still show a free cash flow (FCF) yield of just 2.5% and 2.8% respectively. McDonald’s FCF yield is slightly higher at 3.9%. Chipotle, McDonald’s, and Panera offer earnings yields of 2.5%, 5.4%, and 3.3%.
With these types of valuations, there better be some solid performances for investors to look forward to.
Over the past five years, each of these companies has performed significantly better than the S&P 500, which is up 23%. McDonald’s is up 70% since then, while Panera Bread Co (NASDAQ:PNRA) and Chipotle Mexican Grill, Inc. (NYSE:CMG) have soared 291% and 306% respectively. From June through mid-October of 2012, Chipotle fell dramatically, causing its stock to drop over 11% in the past year. However, if we look at the chart below, we will see how well these companies have performed in comparison to the S&P 500 since the beginning of the year.
While these are all nice returns YTD, most bargain-seeking investors would not be willing to buy in due to the expensive valuations.
The Foolish bottom line
Now I understand, most people don’t consider any of these restaurants “fine dining” premieres, but they are certainly more expensive than they appear. Yes, they have given solid returns and McDonald’s Corporation (NYSE:MCD) has a phenomenal history of dividends, but if you are looking for a bargain, you might want to shop around. They are all great companies, but as of right now they are pretty pricey.
The article Overpriced Dining originally appeared on Fool.com and is written by Tyler Wofford.
Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald’s, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald’s, and Panera Bread. Tyler is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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