Daily Gains Letter

YUM! Brands: The Next Big Restaurant Stock Winner?

By for Daily Gains Letter |

YUM BrandsYou can’t blame newly installed McDonald’s Corp. (NYSE/MCD) CEO Steve Easterbrook for not being enthusiastic about the fast food restaurant stock. I’m certainly not; you can see my negative view towards the seller of the “Big Mac” here. Even after Easterbrook’s new strategy to turn things around, you can’t get angry at me for not getting too excited. (And then there’s YUM! Brands, Inc., which is looking pretty darn good in comparison—but more on that later.)

McDonald’s New Strategy Not Doing Much for Operations

What is McDonald’s doing to try to turn things around? At the core of the McDonald’s strategy is the realignment of the business into four major areas, along with the conversion of more company-owned stores into franchises.

While the strategy will undoubtedly cut costs and drive franchise fees, it really does little for the company’s operations.

The same conversion move worked for Denny’s Corporation (NASDAQ/DENN); the restaurant stock has nearly doubled in price since the move to sell many of its stores to franchisers. In the case of Denny’s, its success was driven by altering the menu and marketing to bring back customers.

Dennys Corporation Chart

Chart courtesy of www.StockCharts.com

In the case of McDonald’s, I’m hearing whispers about the fast food giant re-evaluating its menu and introducing a premium-priced, custom-made hamburger. Clearly the company has seen the massive surge in premium hamburger operators, such as Shake Shack Inc. (NYSE/SHAK). With that said, it will not be easy for McDonald’s to shake its fast food image.

Honestly, I still wouldn’t be a buyer of this restaurant sector stock.

YUM! Brands & Restaurant Stock Alternatives

There are alternative restaurant sector plays that offer more growth and upside. Recently, I talked about contrarian restaurant sector play Ruby Tuesday, Inc. (NYSE/RT), so that might be one restaurant stock to watch.

Ruby Tuesday Inc Chart

Chart courtesy of www.StockCharts.com

In the large-cap space, YUM! Brands, Inc. (NYSE/YUM), the operator of KFC, Taco Bell, and Pizza Hut, which I call the “triple-bypass specialty,” is making positive waves. I don’t eat this stuff, but clearly the world does, as the stock price has risen from $65.81 over the past 52 weeks to a high of $94.13 on Monday.

YUM! Brands Inc Chart

Chart courtesy of www.StockCharts.com

Investors are encouraged by the company beating first-quarter EPS estimates and improving its metrics, with worldwide system sales rising four percent. KFC, Taco Bell, and Pizza Hut all reported growth.

The company is also positive towards its major market in China, where it operates 4,896 KFCs and a total of 6,846 restaurants, up eight percent year-over-year. YUM! is aiming at opening another 700 restaurants in China this year. And you wonder why obesity levels are rising in the country. Nonetheless, it seems like if you build it, people will come.

Revenues are estimated by Thomson Financial to rise 5.9% this year, followed by an 8.8% increase in 2016. Earnings are predicted to rise to $4.07 per diluted share in 2016.

McDonald’s has its work cut out for it in the restaurant sector, a sector in which I see much better alternative opportunities for growth. McDonald’s could be dead money for the next few quarters, so look elsewhere for opportunities, such as stocks like YUM! Brands.

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