The fast-food industry is evolving rapidly as more health-conscious customers emerge alongside those in search of value-priced offerings. Menus have to be constantly revamped to cater to their demands. But, a $1 trillion global informal restaurant market is in the cards and all the companies want to take share. Competitors will make more and more efforts to squeeze out more value from offerings at a thin margin in order to remain competitive.
Let’s see how the three major fast-food chains are performing.
McDonald’s Corporation (NYSE:MCD): Dragged down by Europe
Despite slight growth in year-over-year terms, the company’s first-quarter 2013 earnings of $1.26 per share and revenues of $6.61 billion missed analysts estimates. These results were mostly driven by share repurchases.
McDonald’s Corporation (NYSE:MCD) vulnerability to Europe’s debt situation, decelerating growth in Asia and extreme competition in the U.S. has left the company less appealing to investors. Europe alone accounts for 40% of the company’s top line.
However, McDonald’s Corporation (NYSE:MCD) has always continued its product innovation and geographic expansion, which still make it an indisputable leader. Its current re-franchising strategy is expected to reduce capital requirements and boost earnings per share, allowing free cash flow to be destined to brand-recognition campaigns. I hope this effort is enough to help the company bring better results in the future.
The Wendy’s Company (NASDAQ:WEN): Repositioning efforts
The Wendy’s Company (NASDAQ:WEN) is the world’s third-largest quick-service hamburger company. The company has 6,500-plus franchise and company-operated restaurants in 28 countries.
The company earned $2.1 million in the first quarter, only a penny per share, representing an 83% decline from the $12.4 million in the prior year quarter. Earnings actually improved slightly since last year’s earnings included a $0.05 benefit per share from the sale of Arby’s.
The Wendy’s Company (NASDAQ:WEN) is spending heavily in renovations, trying to make its restaurants resemble bistro eateries, which are gaining popularity. These expenses will be around $440-$500 million and involve refurbishing 50% of the company-operated restaurants and 20% of the total system by 2015. These operations will provoke a great reduction in cash flow.
I believe The Wendy’s Company (NASDAQ:WEN) intention of distancing itself from its peers is a good strategy, since pricing and marketing in this market will only provide low results. However, increasing costs are something to worry about. Limited international presence is also a key factor, as brand recognition outside the U.S. is still low and building it requires great amounts of cash.
Burger King Worldwide Inc (NYSE:BKW): Weak performance in the Americas
Burger King Worldwide Inc (NYSE:BKW) operates one of the biggest fast-food hamburger chains in the world and is the third-largest burger chain in the U.S.
The company reported a net income of $35.8 million, doubling the prior-year figure of $14.3 million. Earnings per share are $0.10 compared to $0.04. However, revenue decreased 42% to $327.7 million boosted by a 3% drop in the U.S. and Canadian markets. A poor mix of menu items explained the sales decline, according to management.
Just like The Wendy’s Company (NASDAQ:WEN), Burger King Worldwide Inc (NYSE:BKW) is going through renovations aimed at giving a more modern look to the stores. About 600 locations have been renovated already and by the end of fiscal 2015, 40% of all of Burger King’s restaurants will be. In addition, Burger King Worldwide Inc (NYSE:BKW) introduced a new coffee program with Seattle’s Best Coffee which drove coffee sales up 20%.
Having nearly half of its locations overseas, the company has a respected international presence. Same-store increases were 0.8% in Europe and 2.7% in Asia, beating McDonald’s Corporation (NYSE:MCD). The company might be struggling in the Americas, but could evolve as a major threat for its peers in the emerging markets.
Bottom line
McDonald’s Corporation (NYSE:MCD) is still in reasonably decent shape but its vulnerability to macroeconomic headwinds is becoming a concern. I would not keep it in my portfolio until the company’s innovation and re-franchising strategies start to show higher earnings.
Higher investments are a risk for The Wendy’s Company (NASDAQ:WEN) since there is a chance that the company could not turn them into future profits. Although the company needs them, its results are unpredictable, especially in the emerging markets where the focus should be. I would sell the stock.
Although I do not find Burger King Worldwide Inc (NYSE:BKW)’s remodeling plan very appealing as it is relatively new and unproven, the company has strong brand recognition and presence overseas. If its efforts remain consistent, it is a stock worth keeping as it will profit from the emerging markets growth.
The article The Best Fast-Food Bet for Your Portfolio originally appeared on Fool.com and is written by Damian Illia.
Damian 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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