Globalization works both ways. Many American quick service companies are seeing growth from expansion into international markets. Though this is a wonderful growth story, value-minded investors will have to sit out until these firms trade at more reasonable price multiples.
McDonald’s to franchise in Russia
McDonald’s Corporation (NYSE: MCD), which ranks as the number one restaurant globally in terms of sales, is planning to expand its operations deeper into Russia in response its competitors who have ventured into this emerging market. Since 1990 when it first set up in Russia, McDonald’s Corporation (NYSE: MCD) has been operating its outlets single-handedly, but this is set to change after selecting Rosinter, the largest restaurant-holding company in Russia, to be its first franchise outlet.
After the collapse of the Soviet Union, McDonald’s Corporation (NYSE: MCD) became the first foreign fast food restaurant to set up shop in Russia. Other fast food chains which have expanded into Russia include Yum! Brands, which is planning to open 70 new outlets in Russia and its neighboring countries. Subway and Burger King Holdings, Inc. (NYSE:BKC) are the other internationally recognized fast food chains which have also been rapidly expanding in Russia.
Starbucks entering Vietnam
Starbucks Corporation (NASDAQ: SBUX) announced plans to add hundreds of stores in Vietnam even as it opened its first cafe in Ho Chi Minh City. The company’s President for China and Asia Pacific operations John Culver said, “There is definitely a pent-up demand for Starbucks coming to the country. We will aggressively grow.”
The new 4,000 square-feet (372 square meters) two-story cafe, will have an outdoor patio, sell roast-duck wraps, Asian dolce lattes and other locally inspired items, and will be operated by its licensee for Vietnam – Coffee Concepts (Vietnam) – a subsidiary of Hong Kong Maxim’s Group which already operates stores in Macau and Hong Kong.
Starbucks Corporation (NASDAQ: SBUX) plans to have about 4,000 stores in the Asia Pacific region by the end of this year, as the company expands in Asia to boost sales. The company has more than 18,200 stores worldwide, and although it currently has no location in Laos or Cambodia, Culver said Starbucks Corporation (NASDAQ: SBUX) will eventually move into these markets. Due to Vietnam’s growing economy, with GDP expanding by 4.7% in 2011, Starbucks rival Dunkin’ Brands Group Inc (NASDAQ: DNKN) also announced plans to open Dunkin’ Donuts units in Vietnam, in addition to Baskin-Robbins ice cream stores that are already there.
Stymied expansion into Indonesia
Recent reports indicate that the parent company for popular fast food outlets such as KFC, Pizza Hut and other outlets may have to halt its expansion plans in Indonesia. Yum! Brands, Inc. (NYSE: YUM) stands to lose out on business in a country ranked fourth globally in terms of population. The expansion plans have been hindered by government protectionism policies that favor small enterprises. Yum! Brands, Inc. (NYSE: YUM) is planning open new outlets in overseas markets especially in China and Southeast Asia. The protectionism policy is set to be implemented within the five years and it aims to limit the number of foreign restaurants operating in Indonesia to 250 outlets.
These restrictions are terrible news because Indonesia is such a large market for sales growth. Yum! Brands, Inc. (NYSE: YUM) already has 700 locations in Indonesia, and the nation recorded an increase in fast food sales by 15%. Unfortunately, restrictions may prevent Yum! and other U.S. food store outlets from attaining their sales targets, which in turn may trigger other nations to adopt these policies. Darren Tristano, executive vice president said, “It’s going to probably slow things down a bit. This is going to be a bump in the road.” Gita Wirjawan, Minister for Trade, announced the rule earlier this month with the aim to protect small enterprises from unfair competition.
However, the rule has exceptions for special cases. According to Bill Edwards, CEO of Edwards Global Services, said, “Indonesia is a very attractive market because of the extremely fast-growing middle class with discretionary income.” Denny’s Corporation (NASDAQ: DENN) is also a client of Edwards, which acts as an advisor for overseas expansion. Yum! Brands, Inc. (NYSE: YUM) has further indicated that its expansion plans will not be hindered by the protectionism policy; however, it will be an uphill task to maintain the quality of its products to compete with smaller enterprises. Some of the companies that are going to be affected by the new directive include PT Fastfood Indonesia as it has more than 400 KFC outlets operating in the country. Dunkin Brands has also managed to open about 600 franchised stores in Indonesia.
Quick service stocks at caviar prices
Unfortunately, none of the stocks making entryways into new markets are trading at attractive multiples:
| Ticker | Company | P/E | P/S | P/B | EPS Growth Next 5 Years |
| DRI | Darden Restaurants | 13.53 | 0.75 | 3.3 | 7.2% |
| EAT | Brinker International | 17.39 | 0.88 | 10.06 | 13.8% |
| DENN | Denny’s | 5.28 | 1.08 | NA | 19.0% |
| DPZ | Domino’s Pizza | 27.74 | 1.71 | NA | 14.0% |
| YUM | Yum Brands | 19.9 | 2.22 | 14.1 | 11.7% |
| SBUX | Starbucks | 31.32 | 3.19 | 8.44 | 18.6% |
| BKW | Burger King | 56.21 | 3.3 | 5.54 | 17.7% |
| MCD | McDonald’s | 18.11 | 3.53 | 6.37 | 8.9% |
| DNKN | Dunkin’ Brands | 40.5 | 6.15 | 11.68 | 15.4% |
Denny’s Corporation (NASDAQ: DENN)’s may appear cheap based on valuation, but it has a negative accounting value for its equity, and stocks with this condition have underperformed as a group. Darden Restaurants, Inc. (NYSE:DRI) is more reasonably priced, but it is hardly compelling as an investment. None of the growth story stocks mentioned even get near it on a price-to-sales or a price-to-earnings basis. As a whole, restaurants stocks seem to be pricey right now.
Conclusion
Investors should wait for valuation multiples to cool for these stocks before considering them as buy candidates.
The article Quick Service Food Stocks Are Trading at Caviar Prices originally appeared on Fool.com.
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