In the last year, McDonald's (MCD, Financial) stock has declined by 4.9% and the company’s stock has fallen from a recent high of $103.5 to current levels of $94.3. The recent decline in the stock has been primarily due to the China meat scandal. McDonald's has more than 2,000 restaurants in China and had a strong relationship with OSI, which is in the centre of controversy.
The meat supply will be hit and McDonald's needs to find an alternative supplier. More than the supply, the company’s reputation in China has taken a hit as a result of the scandal. China is currently McDonald's third biggest market as measured in number of restaurants.
McDonald's weak stock performance has also been due to the company’s low EPS growth of 1% for 2Q14. The company’s EPS for 2Q14 increased to $1.4 as compared to $1.38 in 2Q13.
The sharp recent decline in Yum! Brands stock has primarily been due to the same problem with Yum! Brands suspending its meat supplier in China. Yum! Brands has 6,400 restaurants in China and this is a big negative development for the company.
The company’s KFC and Pizza Hut brand sales will be impacted meaningfully as a result of the OSI supplying expired chicken and beef to restaurants. For the second quarter of 2014, Yum! Brands had reported robust sales growth in China and this negative event will reverse the positives for the company in a big market.
Burger King (BKW, Financial) stock has gone up by 28.9% in the last one year and the stock is a clear winner in terms of upside as compared to the other two companies. Therefore, Burger King has really been the king and will continue to perform better than peers in the foreseeable future.
Burger King currently has more than 13,500 restaurants in nearly 1000 countries with the company having more than $16 billion in annual system-wide sales. For the second quarter of 2014, Burger King reported an EPS growth of 18.8% to $0.21 per share as compared to $0.18 per share in 2Q13. For 1H14, Burger King reported an EPS of $0.38, an increase of 36% as compared to an EPS of $0.28 in 1H13. Therefore, consistently robust performance has been the key to Burger King’s stock upside.
The company's business strategy for growth is simple – to focus on few, but high impact priorities and increase guest satisfaction. In the words of the CEO, marketing consistency and operational simplicity helped the company drive a third consecutive quarter of comparable sales growth. In the international markets, product innovation has been the key to growth.
I am also positive on Burger King’s growth in APAC at a time when McDonald's and Yum! Brands reputation has taken a hit. Burger King has already registered seven consecutive quarters of comparable sales growth in APAC and will look at further make inroads in the big market. The company’s China performance has been driven by premium products and a value layer refresh. I believe that new production will be on offer and product innovation will be the key to growth in China. Menu innovation has already yielded positive results for the company in 2013 with limited time offerings such as the Angry Whopper® sandwich and Chipotle Whopper® sandwich, among others to attract consumers.
From a strategy perspective, Burger King plans to have 40% of its U.S. and Canada Burger King restaurants on a modern image by the end of 2015. According to Burger King, the re-imaged restaurants have experienced a sales uplift of approximately 10%-15% on an average. Therefore, comparable restaurants sales growth is likely to get a boost in 2015.
From a financial health perspective, Burger King has been consistently reducing its leverage and this is certainly positive. The company’s net debt to TTM adjusted EBITDA has declined from 4.4 in 1Q12 to 3.0 in 2Q114. With strong growth likely in the future, the company’s leverage will continue to decline.
Overall, Burger King is doing the right things at a time when McDonald's and Yum! Brands have been unfortunate to be a part of a major problem in China. Burger King is likely to grow at a strong pace with analyst estimates suggesting 14.6% earnings growth in 2014 and 18.8% earnings growth in 2015.
I believe that investors can consider exposure to this stock for the medium to long-term. Besides capital appreciation, Burger King will also provide investors with higher dividends in the years to come.