Market Overview

Are You Long the French fry? MCD vs. BKW

MCD vs. BKW: "World Famous Fries" or "Satisfries"?

Almost 30% of the American potato crop goes toward frozen fries. And we aren't the only country eating them; Belgium's per capita consumption of fries exceed's America's by a third. On the one hand, fries might increase the risk of type 2 diabetes (and other health problems) while on the other they promise reduced stress thanks to a rush of oxytocin. If you're considering going long on the french fry we offer up some analysis around valuation drivers, drivers of margin and growth expectations for some of the companies in the french fry business. We'll also give you an insight into their dividend quality for you to consider.

Investing in French Fries? Some stocks to consider

  • Hoping to appeal to both our risk and reward systems, Burger King Worldwide Inc. (NYSE: BKW) has recently launched low(er) cal french fries that take a stab at McDonald's classic fries, offering you 40% less fat and 30% fewer calories. Same reward, less risk. At 20-30 cents more than the regular fries, many people could opt to keep their waistlines in check. Are you already sold?

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  • McDonald's Corporation (NYSE: MCD), is giving customers a no risk, low reward option. The chain has announced that it will offer salad, fruit or vegetables as an alternative to fries in their value meals. Of course, once you're in the store, even if you walked in determined to order the salad this time round, your brain could do a bait and switch on you. The chain does sell 9 million pounds of fries every day across the globe, after all.
  • The Wendy's Company (NYSE: WEN) launched a new skin-on, sea-salt french fry in late 2010 which didn't pass muster with seriouseats.com; the thrillist too rated Wendy's fries as tenth best (lower in ranking than the other chains mentioned in this article).
  • Sonic Corp's (NASDAQ: SONC) fries were rated the healthiest (this was before Burger King's recent launch) by WebMD;  lowest both in calories and bad fats. It's worth noting that McDonald's fries come in second on both those counts right next to Sonic's.

How do these companies stack up against each other? Today we analyze these four companies relative to each other and highlight some of the fundamentals for McDonald's Corporation and Burger King Worldwide. We used CapitalCube's customize peer feature to customize our peer set.

Investors are expecting a Strategic Turnaround at Burger King

Burger King Worldwide (NYSE: <a class=BKW) and McDonal'd (MCD): ROE vs. P/E" class="alignleft size-medium wp-image-7692" data-mce-src="http://www.capitalcube.com/blog/wp-content/uploads/2013/10/BKW_Valuation-drivers-300x195.png" height="195" src="http://www.capitalcube.com/blog/wp-content/uploads/2013/10/BKW_Valuation-drivers-300x195.png" title="BKW_Valuation-drivers" width="300" />The market expects BKW to grow faster than the median of its chosen peers (PE of 44.4 compared to peer median of 35.7) and to improve its current ROE of 12.3% which is below its peer median of 24.3%. Thus, the market seems to expect a turnaround in BKW's current performance. The company's current Price/Book of 5.2 is about median in its peer group. McDonald's on the other hand has a harvesting profile because of the market's low expectations of growth (PE of 17.5) despite its relatively high returns (ROE of 36.3% compared to the peer median ROE of 24.3%).

McDonald's has Tighter Control on Operating Costs

Drivers of Margin for MCD and BKWMcDonald's gross margin of 44.5% is around peer median suggesting that its operations do not benefit from any differentiating pricing advantage. However, the company's pre-tax margin is more than the peer median (29.1% compared to 12.9%) suggesting relatively tight control on operating costs. Burger King on the other hand has a comparatively high gross margin of 59.0% versus the peer median of 40.6%. This suggests that it has a differentiated strategy with pricing advantages. However, Burger King's pre-tax margin of 14.5% is around the peer median which, combined with the healthy gross margin, suggests higher operating costs relative to peers.

Superior Growth Expectations for Burger King

Growth Expectations for BKW and MCDWhile BKW's revenues growth has been around the peer median in recent years (-8.1% vs. -8.5% respectively for the past three years), the market gives its shares a higher than peer median PE ratio of 44.4. The market seems to see faster growth ahead for the chain. Though MCD's revenues growth has been above the peer median (6.6% vs. -8.5% respectively for the past three years), the stock's PE ratio of 17.5 is less than the peer median. This implies that the company's earnings are peaking and the market expects a decline in its growth expectations.

Dividends: The ketchup on the side

Dividend Quality: Ending Cash Cushion MCD and BKWOver the last twelve months (prior to 2013-06-30), MCD paid a high quality dividend, which represents a yield of 3.2% at the current price and the dividends paid during each of the last five years were consistently of high quality. However the ending cash balance is less than the last full year dividend payment and cannot be relied on to cushion any significant reduction of cash flows in the future. In the same period, BKW paid a high quality dividend, which represents a yield of 0.8% at the current price. But BKW's Dividend quality trend has not been consistent over the last five years. Of the dividends paid during each of these years -- 4 were high quality and 1 was low quality. In Burger King's case the ending cash balance, with a dividend coverage of 12.4x, provides a substantial cushion in case of a significant reduction of cash flows in the future. Here's why we think that the cash flow coverage of the dividend paid versus the dividend payout. CapitalCube's overall score for dividend quality is aggregated based on multiple metrics. Burger King's Dividend Quality scores an 83 out of a possible 100 while McDonald's gets 67.

Last year we published a series of articles on McDonald's. If you're curious about how the company looked at that time, check these out: Is the McMeal going to hash it? (Fundamental Analysis), McMergers & Acquisitions (Likely Corporate Actions assessment), No Super Size options here (Dividend Quality) and MCD Earnings Quality Analysis.

Want to know even more on Burger King's fundamentals like the sustainability of its returns and its earnings leverage? This free report covers it all.

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 MKC) Earnings Analysis: Milking the Business?">Disclaimer

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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