3 Fast Food Stocks to Order as Investors Eye Casual Diners

With many fast food operators seeing their stocks up this year, investors grow an appetite for other restaurant plays.
Anthony RussoNov 10,2020,23:15

Thanks to some shockingly good news on the vaccine front Monday, the stock market has been surging. Investors have now shifted their focus to hard-hit industries this year including the travel and casual dining sectors as they bet on a return to normalcy. Still, there is value in fast food stocks; and we are still talking about the autumn of 2021 at the very earliest when a vaccine would be made available en masse.

Covid-19 Eats Into Profits

The U.S. restaurant industry is expected to lose $240 billion by the end of the year, according to the National Restaurant Association.

The fast-food segment of the industry fared the best of any segment. And so did fast-food stocks, most of which are in the green. Digital ordering and drive-thrus kept this segment afloat while others suffered. Of the sales from fast-food restaurants, 70% came from the drive-thrus, according to the New York Times.

That said, some fast-food restaurants have been left out of the recent rally despite seeing their shares up year-to-date. Let’s take a look at a few that you should consider buying:

1. McDonald’s Corp. (NYSE: MCD)

Market Capitalization: $158.73 billion

YTD Return: +7.73%

Even with some impact from the pandemic, McDonald’s remains the world’s largest fast-food chain. There’s a lot to like about the stock.

On Monday, McDonald’s posted its third-quarter earnings. They may not have wowed investors, but they still managed to beat expectations. For the period, McDonald’s revenue was $5.42 billion, down 2% year-over-year on earnings of roughly $1.8 billion, or $2.35 per share. The results show a strong recovery from its abysmal second quarter when it saw its revenue tumble more than 30%.

It was also announced Monday that McDonald’s is expanding in the plant-based meat game with Beyond Meat (Nasdaq: BYND), launching a new burger called “McPlant” in the U.S. Last year, McDonald’s began experimenting with the product in Ontario Canada; now after receiving "an encouraging response," McDonald’s will test the product in some U.S. cities.

However, there’s one problem: Neither McDonald’s nor Beyond Meat have confirmed that they are jointly working together on the McPlant which has raised analysts' eyebrows.

“While we firmly believe that Beyond Meat will ultimately be McDonald’s supplier for its McPlant platform, we don’t expect McDonald’s to launch a plant-based burger in the U.S in 2021,” BTIG analysts lead by Peter Saleh wrote, as cited by MarketWatch Tuesday.

They added, “Furthermore, we find it extremely strange that neither management team is willing to confirm a relationship or intent to work together.”

While we let the unknowns between McDonald’s and Beyond Meat play out, shares of the world’s largest fast-food company are down nearly 2% since Friday, as investors have shifted their focus to casual diners.

I would look to take advantage of a buying opportunity here at its current levels. Out of McDonald’s 14,000 U.S. restaurants, almost 95% of them have drive-thru operations.

2. Wendy’s (Nasdaq: WEN)

Market Capitalization: $5.1 billion

YTD Return: +2.4%

Meanwhile, the previous quarter did not go as well as expected for the mid-cap fast-food operator, Wendy’s.

While revenue hit $452.2 million, up from $437.9 million in the same period in 2019, it was below the FactSet consensus of $454.0 million. Since the earnings report earlier this month, the stock has fallen 3%.

However, some positives came out of the quarter. Although revenue missed expectations, it was still positive growth. Its boost in sales can be attributed to Wendy’s breakfast offerings in the U.S., which was rolled out in March, as well as the company's booming digital business. Since the launch of its rewards program in July, app downloads have surged 15%.

Another positive that came out of the quarter was it reaching its largest global comparable-restaurant sales growth figure in 15 years.

Given the strong recovery along with its growth in digital business. I like the stock long-term. However, the stock trades at nearly 50 times earnings which isn’t cheap. I would target a buy on the stock at around $20 per share.

3. Yum China Holdings (NYSE: YUMC)

Market Capitalization: $24.04 billion

YTD Return: +18.57%

One of the few fast-food stocks that hasn’t seen much of a negative impact lately is Yum China. In fact, shares in the Shanghai-based company have risen nearly 10% since it posted better-than-expected third-quarter financials last month.

For the quarter ending September, Yum China generated revenue of $2.35 billion, up 1% year-over-year on earnings of 66 cents per share. Zacks Equity Research estimated that Yum China would earn 46 cents per share while expecting its revenues to come in 4% lower.

Similar to Wendy’s, the Chinese operator of KFC, Pizza Hut, and Taco Bell in the quarter saw surging demand for its digital orders. Its digital orders, which include delivery, mobile orders, and kiosk orders made up roughly 78% of KFC and Pizza Hut's sales in the third quarter.

The company also brought back its quarterly dividend at 12 cents per share after suspending it in late April.

Also, the company has updated its guidance and is now looking to open up more than 900 new stores and make capital expenditures in the range of $500 and $550 million in fiscal 2020.

As to whether you should buy, Yum China seems fairly-priced at around $57 per American depositary share. However, I would recommend its Hong Kong shares, which trade under the code "09987".

Yum China is still fairly new to the Stock Exchange of Hong Kong, debuting in September, when it raised $2.23 million.

Fast Food Now Overlooked

With investors turning their focus to hard-hit industries this year, fast-food has been overlooked. But still, while it’s encouraging to potentially get a highly effective vaccine, the return to normalcy in all likelihood won’t happen until the third quarter of next year at the earliest.

Short-term, fast-food operators are the better bet to make because the need for social distancing.

For that reason I still prefer choice fast-food stocks over casual diners, but as they say at Burger King, “Have it your way.”

Topics:McDonald's, Wendy's, Yum China.