All week Cramer will be comparing stocks from the same sector to see which is the better buy right now for investors.
On top of that, he’s showing viewers how professional money managers go about making the same decisions. This is important because big money moves the market. So to know how these guys value a stock is to know how the market will value it. Cramer introduced a 10-point scale to rate stocks.
The first contest of the week was between McDonald’s and Burger King. Even before picking apart the companies, though, Cramer recommended looking at the sectors.
Money managers always look for a sector that will outperform the market as measured by the S&P 500. And this is important because 50% of a stock’s performance is depends on its sector. We know that during tough economic times that people tend to trade down, seeking out discounts in all areas of their lives, so cheaper restaurants like Mickey D’s and BK should do well, and more importantly, better than the S&P. So each company gets three points for being in the right place.
Then we have to look at growth, consistency and dividends.
Cramer’s made this pint a thousand times: Growth is like crack on Wall Street. This is what the big money guys value above all else. They ask pertinent questions such as these: How fast in the industry growing? Are these companies growing faster than the industry? Is there still room for more growth? You want to try to be predictive here. BK looks to be growing faster than McDonald’s and the former has less exposure overseas (MCD is already in 110 countries). That means much more expansion potential for Burger King. Score three points for BK and 1.5 for MCD: 6-4.5.
In terms of consistency, the scales have to tip in McDonald’s favor, Cramer said. And BK’s only been public since May 2006. Give MCD a point, bringing the totals up to 6-5.5.
McDonald’s also wins when you compare dividends. A dividend accounts for as much as 50% of what a stock returns to you over time, Cramer said. And MCD’s 2.4% beats BK’s 0.9%. Plus, MCD has a history of raising its dividend. Award one more point for McDonald’s: 6.5 to BK’s 6.
We also look at raw costs, and how each company is handling them. This is important because raw costs result in either higher prices for consumers or less profit for the business. Hands down, McDonald’s wins this category. Just look at the trailing 12-month operating margins: 26% versus BK’s 14%. And last week MCD CEO James Skinner told us that his company is using its size to get lower prices for commodities. Give MCD another 1.5 points for this and BK nothing. That puts the score at 8-6, McDonald’s.
So MCD’s the winner. But still the market values BK at 19 times earnings while MCD is earning a multiple of only 18. That’s wrong, Cramer said. And the work we just did proves it.
Jim’s charitable trust owns McDonald’s.
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