Fast-Food Fundamentals Are Timeless

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Timing is everything -- or is it? Many are inclined to apply that adage to almost everything they do. And when it comes to the stock market, there are pros who swear by it. "Wait for the right time," is the usual advice when it comes to buying or selling.



One way of "timing" the market is by looking at the economic cycle. Some industries do better in the fourth and first quarter of the year, like retail stocks which depend on the holiday shopping seasons. When consumer confidence is up, retailers benefit too. So timing players snap up shares when they see such signals of improved consumer optimism.



Some industries, such as banking and finance, are affected by the rise and fall of interest rates. Perhaps the best example of an industry currently in play because of timing is the oil industry. Shares of the oil producers have soared because of the perception that the crude-oil supply could be disrupted for geopolitical reasons.



BAD REPUTATION.

While it's true that some people make a living pursuing the timing principle, I can't say it's paramount in playing the stock market. I know a lot of professionals who have lost money with it. Remember, timing falls short when everybody is on to it. Timing should be just one of the many tools to use in stock investing. More important is to pick the right stocks -- all the time.



The restaurant group is a fine example. If you were trying to time this industry, you would count the group out. Restaurant stocks did poorly in 2005 because of increased competition, surging fuel prices, and massive layoffs all around. They haven't spiked this year because Wall Street is still mostly sour on them. Substitute a slow-growth economy for massive layoffs, and it's the same story as last year.



But there are some restaurant companies that look appetizing despite the industry's problems. A fundamentally sound company is what you should look for -- in any industry, anytime. Despite a less than robust economy and high oil prices, restaurants are doing O.K. Restaurant-industry analyst Joseph Buckley of Bear Stearns says there's "in-line or better performance pretty much across the board." And things should be as good, if not better, the next quarter, according to Buckley's analysis.



HOUSEHOLD NAMES.

That's definitely a plus. Even so, go after the best in the group. In this case, it would be those that have begun to expand their product offerings and therefore possess solid growth potential. Among the standouts are the so-called "quick-service restaurants," which we used to call fast-food. They have enjoyed the best growth trends and have become more confident about their earnings outlook. In fact, Buckley doesn't expect any restaurant operator to miss its earnings goals.



What restaurant stocks will perform better than most? Based on various metrics, the stocks that should juice up portfolios are Yum! Brands (YUM), which owns Taco Bell, KFC [Kentucky Fried Chicken], Pizza Hut, and Long John Silver's; Starbucks (SBUX), the company that made coffee a national obsession; and McDonald's (MCD), the largest and best known quick-service restaurant.



Yum's stock has been on the rise, from $47 in early April to $51 on Apr. 26. And Starbucks has been on a roll since September, leaping from $23 to $38 on Apr. 26. McDonald's, on the other hand, has been quite sluggish, trading between $33 and $36 since January. On Apr. 26, it closed at $34.



HIGH HOPES.

Yum is the world's largest restaurant operator, based on number of units, with more than 34,000 eateries worldwide. In the U.S. alone, it has more than 25,500. A lot of investors bailed out of the stock last year when a prohibited dye, called "Sudan dye," was discovered in certain KFC products in China. And the stock got hammered even further when fear over avian flu started to spread. Despite all that, Yum was able to drive earnings up by 10% in the first quarter, which Buckley called "impressive."



Although Yum performed poorly in China last year, Buckley believes that country will be the "premier growth vehicle" for the company going forward. In the U.S., results at KFC and Taco Bell were strong. Buckley is confident that Yum will achieve its target of 20% growth in China this year. Worldwide, he forecasts earnings of $2.79 a share in 2006 on sales of $9.4 billion, and $3.07 in 2007 on sales of $9.6 billion, vs. 2005's $2.55 on $9.3 billion. He sees the stock rising to $58 in a year.



Most analysts expect Starbucks to again beat estimates for its most recent quarter [second], which ended on Mar. 31. [Results are to be announced May 3.] "Starbucks remains in a class by itself," says Justin Hellman of Value Line, who rates the stock as one of his top picks. He thinks the stock continues to have good upside potential over the short and long haul.



NOT LOVIN' IT.

The company continues to outpace its peers in same-store sales growth at its 5,056 company-owned retail units in the U.S. and its 1,269 stores overseas. Starbucks also has 4,543 licensed stores. And the company intends to continue growing: It plans to add at least 1,500 retail stores annually for the next several years. Its global long-term target is to have 30,000 stores.



With all that, Starbucks' goal is to boost revenues by 20% annually and yearly earnings by 20% to 25% over the next three years. Analyst Dennis Milton of Standard & Poor's forecasts 2006 earnings of 76 cents a share and 93 cents in 2007, vs. 2005's 61 cents. JMP Securities analyst Kristine Koerber, who rates Starbucks "market outperform," sees the stock at $45 in 12 months.



Although most investors are no longer thrilled by McDonald's, it continues to enjoy strong sales momentum in the U.S., consistent with its strong performance since 2003. The recent upsurge in sales is due to its newer and upscale menu offerings, including salads, chicken sandwiches, and gourmet coffee.



BON APPETIT.

In Europe, sales have also improved. Margins were up at both the company-owned and franchised restaurants. The margin improvement in Europe, although modest, reverses a seven quarter declining trend for the company -- despite a drag in the business in Britain. The improved global results, says Buckley, show McDonald's is moving in the right direction. He estimates it will earn $2.14 a share in 2006 and $2.33 in 2007, vs. 2005's $2.04. McDonald's is reaping the benefits of lower food prices, corporate cost cutbacks, share buybacks, and reduced interest expenses due to a lower debt balance.



Timing, of course, plays well in stocks such as these three restaurant stocks because they enjoy sound fundamentals. But you don't need to time them because they're good investment opportunities. Judging by what these stocks offer, it would be a safe bet that Yum, Starbucks, and McDonald's will satisfy any investor's hunger over the short and long term.