These days, diners are eating out less and choosing more budget-friendly restaurants on account of lofty gas prices and rising interest rates. While many casual dining chains such as Applebee's and Cheesecake Factory feel the pain, fast-food chains appear to be holding up, thanks to their lower prices and convenient locations.
Goldman Sachs analyst Steven Kron thinks two of the best investing opportunities in the restaurant sector are McDonald's (symbol MCD) and Yum! Brands (YUM). On Tuesday, he upgraded both stocks from "neutral to "buy," citing their wide geographic exposure, free cash flows and strong sales approaches.
Yum! Brands, the Louisville, Ky., parent company of fast-food chains Pizza Hut, Taco Bell and KFC, has had a good run since spinning off from PepsiCo in 1997. But the stock, currently $48, is down from its 52-week high of $53 in May. In a note to clients Tuesday, Kron said this recent sell-off signals an opportunity to build positions. Kron cited catalysts he believes will move the company's stock to $57 over the next 12 months. These include Yum's nearly $1 billion in free cash flow, which Kron believes should lead to a dividend increase before the end of 2006. (The present 60-cent dividend yields 1.3%.)
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Yum trades at 17 times the $2.83 per share that analysts think the company will earn in 2006, according to Thomson First Call. The company will announce second-quarter earnings on Wednesday.
As for McDonald's, Kron thinks shares of the world's largest hamburger operator are also poised for renewed growth. McDonald's stock hasn't moved much over the past year, but Kron believes it will take off in the second half of 2006. One reason: The company will likely return more cash to shareholders during 2006 and 2007, in the form of dividends and share buybacks, than the $5 billion to $6 billion it has already committed, Kron says. The present 67-cent dividend yields 2%.
On Monday, McDonald's stock jumped 5%, to $35, after the company said it would post higher-than-expected profits for the second quarter, due to strong breakfast sales and increased sales in Europe during its World Cup marketing extravaganza. The Oakbrook, Ill., company, which will make its earnings known next Tuesday, projected a second-quarter profit of 67 cents a share, compared with Wall Street's estimate of 56 cents per share.
McDonald's trades at 16 times the $2.21 per share that analysts expect the company to earn in 2006. Concludes Kron: "We believe the market is not currently rewarding McDonald's for its balance sheet strength, free cash flow flexibility, and fundamentals in both the U.S. and now in Europe." His 12-month price target for the stock is $41.
-
The Top 10 Side Gigs For Retirees In 2026Money is freedom in retirement; here’s how to earn more of it with a profitable side gig
-
3 Retirement Changes to Watch in 2026: Tax EditionRetirement Taxes Between the Social Security "senior bonus" phaseout and changes to Roth tax rules, your 2026 retirement plan may need an update. Here's what to know.
-
The 'Yes, And...' Rule for RetirementRetirement rarely follows the script. That’s why the best retirees learn to improvise.
-
If You'd Put $1,000 Into UPS Stock 20 Years Ago, Here's What You'd Have TodayUnited Parcel Service stock has been a massive long-term laggard.
-
How the Stock Market Performed in the First Year of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Lowe's Stock 20 Years Ago, Here's What You'd Have TodayLowe's stock has delivered disappointing returns recently, but it's been a great holding for truly patient investors.
-
If You'd Put $1,000 Into 3M Stock 20 Years Ago, Here's What You'd Have TodayMMM stock has been a pit of despair for truly long-term shareholders.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
Dow Climbs 559 Points to Hit a New High: Stock Market TodayThe rotation out of tech stocks resumed Tuesday, with buying seen in more defensive corners of the market.
-
Stocks Rally as Investors Buy the Dip: Stock Market TodayMost sectors are "go" only a day after talk of bubbles, extended valuations and narrow breadth undermined any kind of exuberance.
