What are we looking for?
From rising food costs, economic recessions and market saturation to the changing perceptions about health, fast food franchises have been feeling some heat. Modern society is on the go, and there is plenty of demand for a quick bite at all times of the day. My colleague Rob Belanger and I thought we would take a look at the QSR (quick service restaurants) sector.
We started with North American companies with a market capitalization greater than $300-million (U.S.), and we sorted them from the largest to smallest.
The price-earnings ratio (current share price divided by the earnings per share) is a valuation ratio and generally we are looking for a low number.
The PEG ratio is the P/E divided by the growth rate of the company's earnings. The lower the PEG, the more the stock may be undervalued given the earnings performance.
The cash flow per share is a profitability ratio and is the cash flow divided by the total number of shares outstanding. We are looking for a high number.
Operating margin is a measure of what portion of a company's revenue is left over after paying for the variable costs of production. All our companies had to have a positive OM.
The debt-to-equity ratio indicates the proportion of shareholders equity and debt used to finance the company's assets. A high debt-to-equity indicates a company may not be able to generate enough cash to satisfy its debt obligations. Only companies with a debt-to-equity less than 2 are shown.
Return on equity (ROE) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Companies had to have an ROE greater than 5 per cent.
What did we find?
Starbucks Corp. scored better than the average in five of the six categories. Starbucks is the largest coffeehouse in the world with more than 20,000 stores in 63 countries. The company is rolling out alcoholic beverages in thousands of its stores over the next few years.
Honourable mentions go to McDonald's, Panera Bread and Buffalo Wild Wings. Boston Pizza, A&W and Pizza Pizza do not appear as they are royalty trusts and not corporations.
Investors should contact an investment professional or conduct further research before buying any of the companies listed here.