The US restaurant industry is extremely competitive due to its low overall growth profile. Instead of growing sales while maintaining market share, companies must steal market share from other companies in order to grow. Of course, expanding overseas in search of higher growth is an option and that is exactly what companies within the sector are looking for. Let’s review three US companies that are expanding overseas and putting their focus into high-growth emerging markets.
Still leading the market
is the leading global food-service retailer with more than 34,000 local restaurants serving approximately 69 million people in 118 countries each day. More than 80% of McDonald’s restaurants worldwide are owned and operated by independent local businessmen, making the company the world franchise business model leader.
Despite the high degree of competition in the US, McDonald’s is growing its earnings (not sales) fast. The company has had annual average earnings growth of 14.4% over the past ten years, as well as a continuous upward trend since 2004 (in the last quarter, for example, earnings grew by 2.4% year-over-year). Additionally, its operating margins are expected to grow up to 22% from the current 19.8%.
Since its top line growth is somewhat stalled (the company is growing sales at a rate of 1% year-over-year), McDonald’s is returning more funds to its shareholders. The company has increased its dividend yield, with it now standing as high as 3.10% (which is a three-year high). Trading at 17.2 times its price-to-earnings ratio, I think McDonald’s is a safe bet but with not much up-side ahead.
Starbucks Corporation (NASDAQ:SBUX), the premier roaster and retailer of high-quality coffee in the world, is now a true global company with more than 18,000 stores in 62 countries. Additionally, its expanding fast in emerging markets and is also growing through value-enhancing acquisitions such as Teavana Holdings, Inc. (NYSE:TEA). The tea company will benefit from Starbucks Corporation (NASDAQ:SBUX)’s strong distribution networks and from the buying power it has to negotiate with its supply chain.
Monica Wolfe from Gurufocus said, “Starbucks Corporation (NASDAQ:SBUX) is currently outperforming the returns of the S&P 500 and its competitors in the coffee-making industry. Starbucks Corporation (NASDAQ:SBUX) is really raking in the benefits from its acquisitions of Evolution Fresh, La Boulange and Teavana Holdings, Inc. (NYSE:TEA) as well as its expansion into a more global playing field.”
The company currently trades at about 29 times its price-to-earnings ratio and pays a 1.3% cash dividend yield. I think Starbucks Corporation (NASDAQ:SBUX) will continue expanding its operating margins (which are now at 10.6%) and lifting its top-line, which is growing at an 11% year-over-year rate.
The company is up by 17.5% year-to-date, and I expect the company to continue rewarding its shareholders.
While others are struggling for pennies
The Wendy’s Co (NASDAQ:WEN) is now the world’s third-largest quick-service hamburger company. The Wendy’s Co (NASDAQ:WEN)’s has more than 6,500 franchise and company restaurants in the US and 27 other countries.
Even when the company has wisely refinanced some of its loans to lower interest rates, the underlying business is still not performing on par with its peers. The Wendy’s Co (NASDAQ:WEN) operating margins of 3% are 33% higher than they were six month ago, but still trail behind most of its peers. Though it shows year-over-year top line growth, at 1.7% that growth is less than exciting. That said, the company is spending heavily to renovate its restaurants to more closely resemble the bistro eateries that are rising in popularity and is ready to start ameliorating fast.
With its earnings-per-share growing at an unsustainable but still impressive 200% year-over-year pace, The Wendy’s Co (NASDAQ:WEN)’s trades at 28.5 times its price-to-earnings ration and pays a 2.7% cash dividend yield.
Bottom line
While McDonald’s Corporation (NYSE:MCD) is the safest bet among its peers, it also has the lowest up-side potential. The Wendy’s Co (NASDAQ:WEN)’s is a completely different story. The company is reforming itself and is still far from reaching the 19+% operating margins McDonald’s has. Starbucks Corporation (NASDAQ:SBUX) is my favorite pick among the three companies, however, as the coffee company is ameliorating margins and growing fast while it sells at a reasonable multiple.
McDonald’s Corporation (NYSE:MCD) turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue?
The article Examining US Restaurant Chain Leaders originally appeared on Fool.com.
Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s and Starbucks. Vanina 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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