We all have our opinions on who has the tastiest hamburger, but
which burger joint is the best investment for your portfolio?
Let’s take a look at some well-known burger makers to see
which is may fill up your portfolio with profits.
General trends:
Before getting started, let’s examine the macro trend in sales
at eating and drinking establishments. The first graphic
displays retail sales at food service and drinking places as
reported by the Commerce Department. The graphic
displays the year over year change on a three month average basis
(it is smoothed). Notice that sales have lost momentum, but are
still positive. Year ago comparisons will not get easy until about
January 2014. Sequentially, the level of sales is below the peak
seen in April 2013, and confirms a softening trend in
sales. The recent reduction in gasoline prices may help
bolster sales, but is somewhat offset by the reduction in refinance
activity. According to the Department of Energy, the average
retail price of gasoline was $3.49/gallon compared to $3.82/gallon
a year ago in the last week of measure. Wage growth has also
turned higher, which could be a benefit to demand at the margin.
![](http://staticzacks.net/images/zacks/blogs/1380140170_scaled_425.jpg)
On a brighter tone, the Restaurant Performance index put out by
the National Restaurant Association is above the 100.0 level
suggesting on-going expansion in the industry. The index is
off the recent high, but still in positive territory.
However, there was a reduction in the outlook for sales
volume over the next six months. 37% saw higher sales in the
next six months compared to 46% in July, while 9% saw lower sales
compared to 11% in July.
![](http://staticzacks.net/images/zacks/blogs/1380140189_scaled_425.jpg)
Valuation analysis:
It’s easy to find a hamburger on the menu at most every
restaurant, but the list below focusses on names where the
hamburger is a major part of the business. Let’s start the
analysis by examining valuation. The table below highlights
the hamburger chain, the PEG ratio, the forward 12 month PE ratio,
and the price to sales ratio as of September 24th.
![](http://staticzacks.net/images/zacks/blogs/1380140290_scaled_425.jpg)
(click table to enlarge)
PEG Ratio:
The PEG ratio is the price to earnings to growth rate ratio.
This measure will help us understand the premium or discount
to earnings growth investors are willing to pay to own their
restaurant name. Notice that Red Robin
(RRGB) and McDonald’s (MCD) have the highest PEG
ratios, while Jack in The Box (JACK) and
Burger King (BKW) have the lowest PEG
ratios. However, relative to their median value, BKW
was trading at the lowest premium, while RRGB was priced at the
highest premium. Given that BKW has not been public for a
long time, the median values for BKW needs to be taken cautiously.
RRGB looks expensive both relative to his historical median
and compared to the group. Looking at the cheapest measure
based on the PEG ratio is less easy. Although JACK has the lowest
PEG, it is trading at a premium to its median value.
Wendy’s (WEN) has a lower PEG ratio than MCD, but
was trading at a higher premium to its median value.
Forward 12 Month PE ratio:
Based on forward 12 month PE ratio, MCD is trading at the lowest
valuation in the group and was at a slight discount to its
median. It stands out as cheapest both on an absolute and
relative basis. WEN has the highest forward PE ratio and is
carrying a relatively large premium to its median. WEN,
Sonic (SONC), JACK, and RRGB all had current
forward PE ratios 30% or more to their median. MCD looks like
the value in the group based on this measure.
Price to sales ratio:
The price to sales ratio shows RRGB with the most inexpensive
value just below 1.0, but SONC with the only discount to its median
value. BKW had the highest price to sales ratio followed MCD
and SONC. JACK had a relatively low price to sales ratio to the
group, but the ratio was high to the historical median. RRGB also
had a healthy premium to its median.
Valuation measures are mixed:
Setting up a position ranking for each company relative to its
peers and taking an average, JACK posted the cheapest valuation
followed by SONC. WEN was most expensive. A value
of 1 was assigned to the company with the lowest fundamental
valuation maker, and a value of 6 was given to the company with the
highest fundamental valuation indicator. An average was taken
of the three measures and the company with the lowest average was
deemed most inexpensive, while the company with the highest average
was deemed most expensive.
The same process was performed on the discount/premiums to
median values. In this case, MCD was the cheapest followed by
BKW and SONC (tie). JACK and RRGB were most expensive.
Remember, the history on BKW is limited.
Even though JACK looks cheap compared to the group, compared to
its historical valuation it is on the expensive side. SONC
actually ranked well compared to the group (second place) and based
on its historical pricing (third behind BKW). Like its
$1 menu, MCD was also attractive as it is trading cheap compared to
its historical measures and came in third place compared to its
peers. One could argue, but SONC and MCD come up as winners
using valuation based on the peer group and relative to
history.
Earnings Revisions:
Earnings revisions have varied for the group over the last
thirty days. The table below displays the number of analyst
revisions and the change in earnings estimates for this year and
next year as of September 24th. There is also a column
highlighting the growth rate in earnings per share for the coming
fiscal year.
![](http://staticzacks.net/images/zacks/blogs/1380140363_scaled_425.jpg)
(Click table to enlarge)
Notice that SONC has seen the greatest number of upward
revisions and the consensus estimate for both this year and next
year were each revised up $.02 to $0.72 and $0.84 respectively. The
consensus EPS for RRGB were also raised and there were upward
revisions for WEN and MCD.
Looking at earnings revisions SONC seems to be the stronger
choice than MCD, although JACK, RRGB, and BKW are also Zacks Rank
#2 stocks (Strong Buy).
Earnings per share growth is expected to be the strongest for
JACK followed by WEN and RRGB. The EPS growth outlook at JACK
may help explain its elevated valuation relative to its
history. The market is pricing vibrant sales growth.
MCD had its weakest EPS growth.
Gross margin comment:
The last gross margin at SONC was in line with the median, while
MCD has seen a relatively firm gross margin. JACK has seen
the strongest gross margin relative to the median. RRGB and
WEN have seen gross margin erosion relative to trend with RRGB the
largest. The outlook for EPS growth and gross margin
expansion at JACK suggests that investors may want to take a look
at this name. JACK could be a dark horse candidate to perform
well.
In conclusion:
SONC looks to be the tastiest stock based on a mixture of
valuation and earnings estimate revisions. The company has
guided EPS growth in the 14% to 15% area for fiscal year 2014 and
is projecting low single digit same store sales growth. 2012
and 2011 same store sales growth was 2.8% and 1.8% respectively.
Management is also looking for gross margin to expand 75 to
100 bps in the coming year.
Technically speaking, SONC has run up sharply in recent months,
but old highs near $17 may be seen as a support area on a pull
back. The stock made a high in the $26 area in
2007.
Nick held shares of McDonald’s Corporation at time of
publication. His views and holdings can change at any time.
BURGER KING WWD (BKW): Free Stock Analysis Report
JACK IN THE BOX (JACK): Free Stock Analysis Report
MCDONALDS CORP (MCD): Free Stock Analysis Report
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
SONIC CORP (SONC): Free Stock Analysis Report
WENDYS CO/THE (WEN): Free Stock Analysis Report
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