Fat Profits From Fast Food Stocks

McDonald’s went public in 1965, selling its shares for $22.50; now its stock trades around $90 a share.

Fast food can be an occasional unhealthy indulgence – but fast food stocks can be a healthy dose of profit for your portfolio.

Imagine you were one of the first to buy shares of McDonald’s Corp. (NYSE: MCD), the world’s largest publicly traded fast food company.

When the “golden arches” opened its doors in 1960, it offered just six menu items – including a 15-cent burger and five-cent fries – at its 102 locations. Now it operates more than 33,000 restaurants in 118 countries and serves more than 64 million customers a day.

McDonald’s went public in 1965, selling its shares for $22.50; now its stock trades around $90 a share.

That means today, after 12 stocks splits, 100 shares of the original McDonald’s stock that cost you $2,250 would have grown to 74,360 shares worth roughly $6.7 million – and that doesn’t even count dividends paid out by the company.

No other restaurant chain has matched McDonald’s success, but others have shown phenomenal growth with impressive profits – and I’m going to show you how to find them.

Four Must-Have Factors for Fast Food Stocks
To find a winning fast food stock we have to look at what will drive growth – and related profits – in the future. There are four dominant themes you need to look for.

A clear plan for international expansion – With only a few gaps, the North American and European fast food markets are saturated. Thus, the big chains’ major avenue for growth will run through Asia, South America and the Middle East, with China the prime target. (The Red Dragon was recently described by one restaurant marketing executive as “the biggest growth opportunity for the industry this century.”)

A revenue-growth strategy for existing stores – Growth in established markets obviously won’t be as strong as overseas, but revenue there will continue to make up the lion’s share of the bottom line. The best companies will increase revenue with updated restaurants, new menu items, innovative marketing ideas and customer loyalty campaigns.

A steadily increasing number of franchise operations – When an individual or local company purchases a franchise, the parent company not only gets a large up-front fee, but it also enjoys reduced expenses, a steady cash flow from franchisee profit-sharing and a sharply reduced level of store-specific risk. The parent really has minimal expense relative to the franchise, except for marketing, advertising and product development (all of which it would be doing anyway).

The ability to recognize and react to changing consumer attitudes and tastes – A huge block of consumers is becoming more demanding in terms of quality, added value, healthy choices and nutritional standards – something governments are also likely to mandate in coming years. In other words, business as usual may keep the doors open, but it won’t fuel the kind of growth needed to generate attractive returns for investors.

McDonald’s Corp. (NYSE: MCD), recent price $90.79 – This may be an obvious choice, but it’s hard to argue with success. Mickey D’s strong second-quarter earnings pushed the stock up almost $5 a share in July, and it held most of the gain in spite of the debt-ceiling debacle and resulting market plunge. The company’s profit rose 19%, earning $1.41 billion, or $1.35 a share, on revenue of $6.91 billion.

Year-over-year growth in international revenue grew 5.4% despite a shaky global economy. McDonald’s is making a major push in China, with plans to double its number of franchises over the next three years. It’s also among the first to offer drive-thru service, recognizing China’s recent climb to No. 1 in the world auto market, as well as a “McDelivery” service in dense metropolitan markets.

The company is trying to increase U.S. revenue by remodeling restaurants, adding more playgrounds, and redesigning drive-thru operations to increase efficiency. It broadened the menu to include gourmet coffees and milkshakes, and healthier options like putting fruit rather than fries in kids’ Happy Meals. McDonald’s is also targeting a slightly richer demographic these days, looking to capture some mid-range diners who are scaling back to save money.

Current analyst estimates project full-year earnings for McDonald’s to hit $5.21 a share this year and $5.73 in 2012. The $2.44 dividend provides a current yield of 2.7%, and the median one-year price estimate for the stock is $99.00 a share.

Source: Larry D. Spears, Money Morning