Fast food is a $2.5trn industry, and it’s only growing. In the US, the average person eats fast food 4.2 times per week. The industry is historically considered a relatively safe haven in a stock market crash. I’ve taken a detailed look at three giants: McDonald’s, Chipotle, and Shake Shack.
McDonald’s
McDonald’s (NYSE:MCD) is the largest fast food company in the world, with over 38,000 restaurants in 100 countries. With a long history of success, it is well-positioned for continued growth.
McDonald’s has a strong brand, loyal customer base, and global reach. The company is also constantly innovating, with new menu items and marketing. From an investment perspective, the company has raised dividends for the last 46 years, and holds tremendous cash reserves.
However, McDonald’s is facing increasing competition from other fast food chains. It is also under pressure to improve its image as a healthy choice.
The price-to-earnings (P/E) ratio of the company at 31.2 is slightly below the sector average of 35.7. However, by considering future cash flow using a discounted cash flow model, the fair value of $182 is significantly below the current price of $294.
Overall, McDonald’s is a well-established, global, and profitable company with a strong balance sheet.
Chipotle
Chipotle (NYSE:CMG) is a Mexican restaurant chain that has been growing rapidly in recent years.
Chipotle’s success is due to a number of factors, including its unique brand. The company has also expanded its menu and its geographic reach. Most interestingly for investors fearing a stock market crash, Chipotle has a very strong balance sheet, and is entirely debt free.
However, Chipotle has been hit by a number of food safety scares. In addition, Chipotle is facing increasing competition from other fast-casual chains. The P/E of the company at 54.8 is also fairly high when compared to the sector average of 32.2. With recent increases in the share price, the company is now likely 41% above fair value of $1,454 at the current price of $2,050.
Overall, Chipotle is a fast-growing, profitable, and healthy company with a strong social mission.
Shake Shack
Shake Shack (NYSE:SHAK) is a burger chain that has been growing rapidly in recent years. The company has a strong focus on quality.
Shake Shack’s success is due to a number of factors. These include its unique brand, its focus on quality ingredients, and its commitment to sustainability. The company has also been able to successfully expand its menu and its geographic reach.
Shake Shack is a relatively new company, and it is unclear how it will perform. It is not yet profitable, and its price-to-sales (P/S) ratio of 2.8 is higher than the industry average of 0.9. However, with earnings growth expected at 63% over the next year, Shake Shack aims to be profitable within the next three years.
Shake Shack appears well positioned if demand remains high, and if fundamentals can continue to grow through economic uncertainty.
Am I buying?
Overall, the fast food sector has performed well in recent years. However, with many stocks above fair value, the distinction between the stock and the company must be carefully considered. If there is a stock market crash, this is one of the sectors I will be looking to invest in.
