Daily Gains Letter

Can These Fast Food Stocks Provide Fast Profits?

By for Daily Gains Letter |

Fast Food StocksLove them or hate them, fast food restaurants are an American institution. That’s not a huge surprise when you consider the hamburger was first created here around 1900 and the first fast food restaurant, A&W, opened its doors in 1919. For almost 100 years, our taste buds have been both regaled and assaulted by any number of fast food restaurants, now affectionately called “quick service.”

From its humble beginnings, the restaurant industry has become an economic juggernaut, generating around $1.8 billion in daily sales. In 2013 alone, restaurant industry sales are expected to generate $660.5 billion; that’s equal to roughly four percent of the U.S. gross domestic product. (Source: “2013 Restaurant Industry Pocket Factbook,” Restaurant.org, last accessed November 8, 2013.)

While the U.S. restaurant and quick service industry took a hit immediately following the Great Recession, the industry has bounced back. During the second quarter, trips to quick service restaurants—which account for 78% of industry traffic—were up by one percent, while consumer spending increased by three percent. (Source: “U.S. Restaurant Traffic Increases Modestly and Average Check Growth Drives Spending Gains in Q2, Reports NPD,” NPD Group web site, September 17, 2013.)

More specifically, traffic to fast casual restaurants, which is included under the quick service banner, increased by eight percent in the second quarter. After several consecutive quarters of decline, casual dining held steady. Things were not so good for midscale/family dining restaurants, however, which experienced a two-percent decline in traffic.

Even though the U.S. retail and food services sales results for the third quarter have not been released yet, the U.S. Census Bureau announced recently that advance estimates of U.S. retail and food services sales for September were up 3.2% year-over-year at $425.9 billion. (Source: “Advanced Monthly Sales for Retail and Food Services September 2013,” United States Census Bureau web site, October 29, 2013.)

As we head into the final quarter, restaurant margins have, by some accounts, stabilized; spending has returned to pre-recession levels, and fewer companies in the restaurant industry are facing financial distress. Industry distress levels are at historic lows of 19% versus levels above 50% in 2010 and 2011. (Source: “Restaurant Industry Stable Heading into Final Months of 2013, But Traffic and Spending Concerns Loom Large Over 2014,” Alix Partners web site, October 31, 2013.)

Does this mean you should add restaurant stocks to your retirement portfolio? Our insatiable appetite for around-the-clock fast food suggests it might be a good idea to research any number of financially solid restaurant stocks.

Despite the fact that there are exchange-traded funds (ETFs) covering virtually every industry, sector, index, sentiment, and country on the planet, there isn’t, oddly enough, a restaurant ETF. As a result, investors interested in the restaurant industry will have to wade their way through a myriad of individual restaurant stocks. Below are four restaurant stocks you could consider researching further.

Burger King Worldwide, Inc. (NYSE/BKW) announced third-quarter earnings of $68.2 million, or $0.19 per share; excluding one-time items, the company would have earned $0.23 per share, topping Wall Street estimates. Third-quarter revenue was down sharply as a result of the company refranchising 519 company-owned restaurants in an effort to reduce overall costs. This restaurant stock is trading up 24% year-to-date and offers an annual dividend of 1.3%. (Source: “Burger King Worldwide Reports Third Quarter 2013 Results,” Yahoo! Finance, October 28, 2013.)

While investors were not pleased with The Wendys Company’s (NASDAQ/WEN) third-quarter results, it should be noted that it reported improved margins and same-store sales, and narrowed its third-quarter losses. The restaurant stock also raised its full-year guidance. The company’s share price is up 70% year-to-date. (Source: “The Wendy’s Company Reports Strong 2013 Third-Quarter Results, Raises Earnings Outlook For 2013,” Yahoo! Finance, November 7, 2013.)

Two lesser-known, but equally compelling restaurant stocks include Tim Hortons Inc. (NYSE/THI) and MTY Food Group Inc. (TSX/MTY). Tim Hortons reported solid third-quarter results on stronger sales in the U.S. The coffee and donut restaurant stock is up 21% year-to-date and provides an annual dividend of 1.7%. MTY Food Group is a restaurant stock that operates over 2,200 quick service restaurants under 26 different banners in Canada. This little-known restaurant stock is up 40% so far this year.

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