Fast-Food Sector Attractive Despite Near-Term Headwinds
Fast food stocks could feel the heat near term, but analysts say they should be a stable area for investors longer term.
Both Wendy's and McDonald's shares slumped Tuesday, as investors reacted to Wendy's earnings and McDonald's April sales report.
“Fundamentals [on these fast-food chains] have been great,” said Larry Miller of RBC Capital. “But over the next six months, you have to look at the economy and how it will affect these names…there’s been a lot of noise.”
Stock performance on the fast-food giants have been mixed year-to-date. McDonald’s has declined 7.5 percent, while Yum Brands has surged nearly 30 percent. And Wendy’s has slumped almost 13 percent.
Miller explained that Yum's outperformance over McDonald's is primarily due to the company's large exposure to China and other Asian markets. Meanwhile, McDonald's is closely tied to the U.S. and European countries.
“McDonald’s will see a tough year no matter what,” explained Miller. “They’re up against tough comparisons, unfavorable foreign exchange and their restaurants are largely in the U.S. and European countries.”
Still, at current levels, Miller said McDonald’s is a better buy for investors over smaller rival Wendy’s.
“Wendy’s is in the beginning of a program to revive its brand and it will take several years to catch up,” he noted.
On Tuesday, McDonald's reported a smaller-than-expected risein April same-store sales, held back by a disappointing increase in its U.S. business. Meanwhile, Wendy’s posted earnings that missed Wall Street estimates, hurt by higher fresh beef costs.
Miller said the fast-food sector will continue to show modest improvement overall as the domestic economy continues to show signs of gradual recovery.
“The high beef cost was baked in already—they’ve been high for quite a while,” Miller said of Wendy’s, adding that he expects commodity prices to ease in the latter half of the year.
Meanwhile, Nicole Miller Regan, managing director and senior restaurant analyst at Piper Jaffray said McDonald’s also has an advantage over its peers due to its strong beverage division.
“I think they’re well positioned [into the summer],” she told CNBC's "Squawk on the Street." “What the company can do is sell beverages…at the very least they’ll see low-single digit growth and if pricing can be effective, we might even see mid-single digits.”
Regan has an “overweight” rating on McDonald’s and a $113 price target.
Still, some analysts were very skeptical on the fast-food giant and advised investors to stay away.
“I believe these multinationals with a lot of international exposure are going to have a tough couple of months,” noted Dan Nathan of RiskReversal.com on CNBC's "Fast Money Halftime Report." “The technical picture [on McDonald’s] looks horrible—the stock broke through its 200-day moving average for the second time since 2009.”
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