A McDonald's restaurant near Yonge Street and Lawrence Avenue in Toronto.JENNIFER ROBERTS/The Globe and Mail
Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. michael@wickhaminvestments.com
What are we looking for?
It's no secret that the world loves fast food. Modern society is on the go, and there is plenty of demand for a quick bite at all times of the day. Since the industry will reach $188-billion in sales in 2013, my colleague Rob Belanger and I decided it was time to take a look at the sector.
The screen
We started with North American companies larger than $500-million in market capitalization.
Return on equity shows whether a company is a profit creator or a profit burner, and if it is growing profits without pouring new capital into the business. It indicates how much profit the company generates with the money shareholders have invested. A high number is favoured, and only companies with an ROE exceeding 9 per cent are included.
Enterprise value – market value of equity plus net debt – divided by earnings before interest, taxes, depreciation and amortization (EV/EBITDA) is one of the most commonly used valuation metrics. We are looking for a low number.
Operating margin is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 10 per cent it means that it makes 10 cents before interest and taxes for every dollar of sales.
Our companies had to have positive earnings per share growth, and positive revenue, over the past 12 months to make our screen.
What did we find?
McDonald's Corp., which operates more than 34,000 restaurants in 119 countries, scores well in our valuation ratios. Tim Hortons Inc. also serves up some half-decent numbers.
Georgia-based AFC Enterprises Inc., which was founded in Atlanta in 1992 and manages the Popeye chain of fast food outlets, scores over 94 per cent in ROE.
Dunkin' Brands Group Inc. generates 40 per cent in operating margin, the highest on our list in that category.
Panera Bread Co. Inc. operates 1,700 cafés in 44 U.S. states, and in Ontario, and is the only company with a negative one-year total return. Burger maker Red Robin Gourmet Burgers Inc. prides itself on its four core values, one of which is "having fun." Its investors certainly are; the company has returned more than 167 per cent over the past year (yet the company has the worst ROE on our list).
Before investing in any of these stocks, be sure to contact an investment professional or conduct further research.