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Cramer: The most dangerous restaurant stock in the industry

With June officially in the past, Jim Cramer marked the year's halfway point by finding out out if his top six restaurant chains still can dominate the industry.

"Unlike the department stores, some of these restaurant stocks are having a pretty great year," the "Mad Money" host said.

The stocks in scope were McDonald's, Yum Brands, Chipotle, Darden Restaurants, Domino's Pizza and Restaurant Brands International — the new name for Burger King and Tim Horton's. Cramer ranked them from one to six in various categories.

"In the end, whoever has the least number of points wins, and the one with the highest score is the most dangerous," Cramer said.

A employee sprinkles cheese on a burrito at a Chipotle Mexican Grill restaurant in Hollywood, California.
Patrick T. Fallon | Bloomberg | Getty Images
A employee sprinkles cheese on a burrito at a Chipotle Mexican Grill restaurant in Hollywood, California.

Same-store sales:
It is important to note that the absolute numbers are less important than the trend they represent, Cramer said.

  1. McDonald's – Thanks to the turnaround engineered by CEO Steve Easterbrook, it has accelerated sales.
  2. Yum Brands – Another turnaround story with accelerating numbers.
  3. Restaurant Brands International – Courtesy of solid, steady mid-single-digit same-store sales at Burger King and Tim Horton's.
  4. Darden – Has been quite consistent, even as its main brand Olive Garden has decelerated a bit in the most recent quarter.
  5. Domino's Pizza – While numbers look terrific, they're down dramatically versus the year before.
  6. Chipotle – With a staggering 29.7 percent decline because of the health scare last year, it's in last place.

Company margin performance:
This measures how the company manages labor, food and operational costs.

  1. Yum Brands – Despite headwinds, it managed to boost operating margin significantly.
  2. Darden – The third straight quarter of margin expansion.
  3. Restaurant Brands International – A staggering margin expansion, up 1,200 basis points in the most recent quarter, though the company still hasn't gotten back to where it was three months ago.
  4. McDonald's – Actually declined margins in 2014 and 2015, b and then had a 690 basis point boos in the most recent quarter. That's good, but not where they were in 2013.
  5. Domino's Pizza – It was making an improvement, until the 50 basis point decline in the most recent quarter.
  6. Chipotle – With rising labor costs and falling sales, margin declined by over 2,300 basis points last quarter.

Improved growth & steady earnings stream:

  1. McDonald's – Thanks to the overall by Easterbrook, it has re-franchised 700 company owned locations in the past five quarters.
  2. Yum Brands – Even as it's spinning off its Chinese business to unlock value, it's also moving to become 96 percent franchised by next year.
  3. Domino's Pizza – It's in the middle of a big remodel campaign, and it's also heavily franchised.
  4. Restaurant Brands International – It has been remodeling Burger King, and has just made it 50 percent through in February. That could mean further upside.
  5. Darden – While it doesn't franchise, it has been using a franchise model to expand overseas.
  6. Chipotle – It hasn't franchised any of its locations, which gives it more exposure to the upside when things go right. Unfortunately, it means it has to eat the downside when things go wrong.

Stocks valuation & yield:

  1. Darden – Trades at 16.2 times next year's earnings, with 3.55 percent yield
  2. McDonald's – Has the second highest valuation and yield
  3. Yum Brands – Trades at 20 times next year's earnings with 2.2 percent yield
  4. Restaurant Brands International - It's fairly expensive at 26 times earnings, and only 1.35 percent yield
  5. Domino's Pizza – Even more expensive at 27 times earnings, but historically the stock has been worth it thanks to growth.
  6. Chipotle – Valuation is sky-high at 34 times earnings, no dividend

"McDonald's and Yum brands are tied for first place, but I'd give a slight edge to Yum simply because I don't think it gets enough credit for the China spinoff," Cramer said.

Unfortunately while Cramer believes Chipotle can turn thingsaround, it came in last and remains in the doghouse.

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