McDonald’s Corporation (MCD)’s Role As A Bellwether

As the U.S. economy continues to strengthen, fast food restaurants are slowly starting to show signs of growth.  Many of these quick service companies are offering healthier options to broaden their consumer appeal, and are continuing with aggressive international expansion.

With international growth opportunities continuing to abound, and a strengthening U.S. economy, we look at three quick service stocks trading at or near 52-week highs to determine if they remain solid investments at these levels.

The bellwether

McDonald’s Corporation (NYSE:MCD) is the company most synonymous with the fast food industry.  The company now operates 34,480 restaurants in 119 countries since being founded in 1940.  As of this writing, the stock was trading around $102, just shy of the 52-week high of $103.70.

The company’s 1Q13 earnings report was a mixed bag.  While revenue and EPS were up versus the prior quarter, the company fell short in other important metrics.  Global comparable sales decreased by 1.0% and operating income decreased by an equivalent 1.0%.  The environment in the U.S. was even more challenging, as U.S. comparable sales decreased 1.2% and operating income dropped by 3%. Comparable sales in Europe decreased by 1.2%, and in Asia by 3.3%. On a positive note, the company did return $1.1 billion to shareholders through buybacks and dividends.

McDonald’s Corporation (NYSE:MCD) is currently trading at a P/E of 18.78 versus its five-year average of 16.47.  The company also boasts a strong dividend yield of 3.04% with a price/sales ratio of 3.68.

The portfolio

YUM Brands, Inc. (NYSE:YUM) operates quick service restaurants in the U.S. and internationally.  The company has six business segments: YUM Restaurants China, YUM Restaurants International, Taco Bell U.S., KFC U.S., Pizza Hut U.S., and YUM Restaurants India.  The company operates approximately 39,000 restaurants in 125 countries.  The stock currently trades around $70, down a bit from its 52-week high of $74.75.

First quarter earnings were disappointing and focused around a troubled area in China. At the end of 2012, Chinese food investigators determined that YUM Brands, Inc. (NYSE:YUM) suppliers had fed chickens more antibiotics than allowable under Chinese law.  The adverse publicity from this discovery cost the company greatly.  Same store sales in China decreased 20%, while total sales in China declined by 9%.  Operating profit in China declined by 41%.  The poor results in China had a major impact on global results, as worldwide operating profit declined by 14%. EPS, excluding special items, decreased by 8%, versus the same quarter the prior year.

YUM Brands, Inc. (NYSE:YUM) is currently trading at a P/E of 22.41 versus a five-year average of P/E of 18.98.  YUM has a dividend yield of 1.91% and trades at a price/sales ratio of 3.11.

The elusive

Many of you have likely seen the national advertising campaign from Sonic Corporation (NASDAQ:SONC) featuring its many unique fast food offerings.  If you’re like me, you soon realized that the nearest Sonic was over 100 miles away.  Fortunately, last year Sonic opened near me in northern New Jersey, and the lines stretched well down the highway.  The company operates or franchises 3,556 restaurants in 43 states.  The stock trades around $13.30 and has a 52-week high of $13.58.

The company’s second fiscal quarter earnings were released on March 25 for the quarter ended February 28.  Net income per diluted share increased 100% from the same quarter last year.  Excluding the impact of the extra day in 2012, the company saw same-store sales grow by 1.3%, and company drive-in same-store sales increase by 3.3%.  The company also repurchased over $6 million of stock.

Sonic currently trades at a P/E of 20.35 versus a five-year average of 20.33.  The company does not currently pay a dividend but does have a history of strong operating cash flows.  The company trades at a price/sales ratio of 1.69.

Foolish bottom line

McDonald’s Corporation (NYSE:MCD) appears fully-valued at current price levels.  While the strong dividend yield is attractive, the performance in the most recent quarter raises some concerns.  I would not put money in the stock at these levels.

While the Doritos Locos Taco has had a profound impact on my life, the issues YUM faces in China make the investment too risky.  The company believes that the negative press will blow over, and maintains its aggressive store expansion plans in China.  While the stock price could come back, the performance in the most recent quarter demonstrates just how serious the supply chain issue was.  Until Yum provides financial results that signal the China issues are behind them, I would not put money in the company.

Sonic is the most appealing of the three companies.  It has plenty of room to grow, and the most recent quarter demonstrates building financial strength.  The company has the most appealing P/E ratio, relative to historical precedence and a low price/sales ratio.  Sonic makes a very interesting investment opportunity for an investor with a long-term horizon.

The article Putting Your Money Where Your Mouth Is originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.