Value Meal
Value investors may prefer to play it safe, buying a company with a proven history of success and rock solid financial strength–in that case, McDonald’s Corporation (NYSE:MCD) is the way to go. The company may not be the most exciting growth story in the industry, but this mature fast food giant is trading at an attractive valuation and has a remarkable track record of dividend increases.
With more than 34,600 stores in 120 countries, the company is the undisputed leader in the global fast food industry. Geographical location is a key asset in this business, and McDonald’s Corporation (NYSE:MCD) has placed its restaurants in many of the most desirable locations in major cities worldwide.
The company´s massive size allows it to negotiate better prices and payment conditions with suppliers, and provides it with the resources to invest more in marketing and advertising than the competition. Besides, McDonald’s Corporation (NYSE:MCD) operates nearly 80% of its business via its franchise and affiliate system, which produces rents and royalties with minimal capital expenditures during challenging economic times.
The trend towards healthier eating habits is providing a challenge for McDonald’s Corporation (NYSE:MCD), but the company is adjusting its menu by offering more options with better nutritional qualities. McDonald’s Corporation (NYSE:MCD) pays a 3.1% dividend yield, and has raised its payments each and every year since 1976, so the company has proven that it can adapt and thrive under different conditions.
Quality Coffee
When it comes to Starbucks Corporation (NASDAQ:SBUX), there are some interesting parallels between the stock as an investment and the company´s products: both Starbucks Corporation (NASDAQ:SBUX) and its products are a bit pricey, but at the same time they both offer superior quality and some fairly unique characteristics.
Brand differentiation is a key advantage that allows Starbucks Corporation (NASDAQ:SBUX) to charge higher prices than the competition and generate superior profitability for its shareholders. Even if the US market is quite saturated, the company still has a lot of room for growth in international markets: Starbucks Corporation (NASDAQ:SBUX) plans to have over 1,500 stores in China by 2015, and the Asian country will become the company´s second largest market behind the US over the next couple of years.
Starbucks Corporation (NASDAQ:SBUX) is not afraid of innovating and expanding into different areas: Evolution Fresh, La Boulange, and Teavana are acquisitions that will provide plenty of growth opportunities for the company in the middle term. The company is also expanding into the consumer packaged goods business, and it’s doing quite well in that area thanks to its superior quality and brand presence.
At a P/E ratio above 35 Starbucks Corporation (NASDAQ:SBUX) doesn´t come cheap, but this is a high-quality company that is firing on all cylinders, so a premium valuation is well deserved.
A Spicy Burrito
Chipotle Mexican Grill, Inc. (NYSE:CMG) is one of the most explosive success stories in the restaurant business over the last years. The fast casual category, which maintains the basic speed and experience of the fast food industry while offering higher quality food and atmosphere, is a booming niche, and Chipotle Mexican Grill, Inc. (NYSE:CMG) is a growth leader in that segment.
While most companies in the industry move into highly processed ingredients as they grow in size, Chipotle Mexican Grill, Inc. (NYSE:CMG) has done exactly the opposite, focusing every day more on fresh ingredients for its tacos and burritos. Instead of looking for low cost suppliers, Chipotle Mexican Grill, Inc. (NYSE:CMG) has developed its own network of high quality providers of natural and environmentally sustainable food.
This strategy is obviously more expensive than the typical cost reduction road, but judging by the company´s financial performance, customers have been more than willing to pay a few extra bucks to get better ingredients: Chipotle Mexican Grill, Inc. (NYSE:CMG) has delivered compounded annual sales growth of more than 20% per year over the last five years.
The company is successfully expanding its store base in the US, and international markets are practically untapped, so this spicy Mexican food restaurant will most likely continue delivering above average growth rates over the coming years.
Shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) are selling for a P/E ratio above 43, so valuation is as hot as the company´s burritos. However, long term investors looking for the best growth opportunities in the restaurant industry have good reason to take a look at this innovative, high growth restaurant
Bottom Line
There are many interesting alternatives to consider in the restaurant industry, and each has its pros and cons. McDonald’s Corporation (NYSE:MCD) value, Starbucks’ quality and Chipotle’s growth can provide a yummy and varied menu for investors to choose from according to their own taste.
The article Three Tasty Companies for Your Portfolio originally appeared on Fool.com and is written by Andrés Cardenal.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican (NYSE:CMG) Grill, McDonald’s, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald’s, and Starbucks. Andrés 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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