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A Tale of Two Europes

From: James Cramer
Sent: Thursday, December 08, 2011 8:09 AM
To: Nicole Urken
Subject: MCD/YUM

MCD comps strong. Also need anything out of YUM meeting yesterday including presentation

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Thursday, December 08, 2011 8:12 AM
To: James Cramer
Subject: Re: MCD/YUM

Quite a contrast to Darden guide-down on Tues ! And speaks to strength among some of the restaurant names (like we highlighted yesterday with PNRA/CMG/BWLD)

The airwaves have been dominated by hopes—and squashed hopes—of a solution to the European sovereign debt crisis. Just this morning, equity markets experienced roller-coaster trading as Mario Draghi ultimately shunned the once-hoped-for possibility of aggressive bond buying the European Central Bank.

Yet while the ECBdid not deliver what investors wanted, a European-levered name served up strong results: the golden arches of McDonald’s . Even though Europe represents 38 percent of the company’s operating income, McDonald’s has been able to show continuing strong trends along with market share gains by optimizing their menu, modernizing the customer experience and broadening their strong brand even further. In other words, while we have a sovereign crisis in the Eurozone—affecting the major financial institutions most directly, we are seeing solid trends in some of the consumer categories, particularly ones that are defensively positioned.

Specifically, Mickey D’s reported very strong Novembersame-store sales Thursday morning—up 7.4 percent vs consensus estimates of up 5.1 percent, with strength across all geographies including Europe (up 4 percent) along with the U.S. (up 4.4 percent) and APMEA (up 8.1 percent). These latest results reaffirm the reasons McDonald’s was recommended as one of Mad Money’s stocking stuffers last week. It’s a name that gives you a terrific 2012 and 2013 story with a nice dividend. Not to mention continued expansion (1,350 new restaurants in 2012) and remodels (2,400 in 2012).

Another, even higher-growth restaurant name that reported strong trends in the last 24-hours? Yum! Brands, the operator of KFC, Taco Bell and Pizza Hut. YUM’s investor day Wednesday revealed the strength of its China growth, noting no slowdown, particularly given a goal of 9,000 units in 2020 from 4,190 today with ultimate saturation point at 25,000 units. Importantly, emerging markets now represent 58 percent of the company’s operating income. While questions still linger about a hard landing in China (even after the country’s decision to lower the bank reserve rate requirement last week), the country remains a huge consumer opportunity with the rise of the middle class of nearly 450mm people (growth of 4-5 percent per year) and a national GDP that could triple over the next decade with a fragmented restaurant industry.

It is important to point out both YUM and MCD in Thursday’s down tape, because the positive data points they released over the last 24 hours reaffirm their long-term trajectories, fueled by international potential—even when “international” seems to be a “dangerous” and “risk-on” term these days. They are both strong amidst the Europe cloud, both because of their defensive posture and because of growth in Asia. While both are flirting with their 52-week highs, their long runway of growth makes them both buys here at about 18x earnings—don’t be dissuaded.

Importantly, the growth and upside at MCD and YUM contrasts with Darden , which disappointed again on Tuesday with its guide-down. Darden—otherwise known as Olive Garden, Red Lobster, and Longhorn’s Steakhouse—is a mature US chain with over 1,900 restaurants. Because there is limited room for store growth, the driver for shares is improved same-store-sales and margins—something which we haven’t gotten, damaging the stock despite its solid dividend. As Credit Suisse research has put it, Italian food is struggling just like Italian bonds, with the Olive Garden (half of the company’s earnings) not able to get the price-value ratio right or fend off competition. While Darden’s now-4 percent yield makes it more compelling, there doesn’t seem to be any near-term catalyst for this name that has continued to disappoint.

The bottom line: The Europe cloud won’t cast its shadow over all names. McDonald’s and Yum Brands remain buys up here even with international exposure. And look at some of the other domestic unit-growers too, that, unlike Darden, have unit growth potential—including Chipotle, Panerapage90pnrafalsetrue2pricetruefalsefalsefalse0QuotefalsetrueChartfalsetrueNewsfalsetrueProfilefalsetrueAdd to Watchlistfalsetruetruehttp://api-cdn.cnbc.com/api/chart/chart.aspGE4true3 and Buffalo Wild Wingspage90bwldfalsetrue2pricetruefalsefalsefalse0QuotefalsetrueChartfalsetrueNewsfalsetrueProfilefalsetrueAdd to Watchlistfalsetruetruehttp://api-cdn.cnbc.com/api/chart/chart.aspGE4true3.

Symbol
Price
 
Change
%Change
CMG
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DRI
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MCD
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PNRA
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YUM
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