George Leong: You can’t blame newly installed McDonald’s Corp. (NYSE/MCD) CEO Steve Easterbrook for not being enthusiastic about the fast food restaurant stock.
I’m certainly not; you can see my negative view towards the seller of the “Big Mac” here.
Even after Easterbrook’s new strategy to turn things around, you can’t get angry at me for not getting too excited. (And then there’s YUM! Brands, Inc., which is looking pretty darn good in comparison—but more on that later.)
McDonald’s New Strategy Not Doing Much for Operations
What is McDonald’s doing to try to turn things around? At the core of the McDonald’s strategy is the realignment of the business into four major areas, along with the conversion of more company-owned stores into franchises.
While the strategy will undoubtedly cut costs and drive franchise fees, it really does little for the company’s operations.
The same conversion move worked for Denny’s Corporation (NASDAQ/DENN); the restaurant stock has nearly doubled in price since the move to sell many of its stores to franchisers.
In the case of Denny’s, its success was driven by altering the menu and marketing to bring back customers.
Chart courtesy of www.StockCharts.com
In the case of McDonald’s, I’m hearing whispers about the fast food giant re-evaluating its menu and introducing a premium-priced, custom-made hamburger. Clearly the company has seen the massive surge in premium hamburger operators, such as Shake Shack Inc. (NYSE/SHAK). With that said, it will not be easy for McDonald’s to shake its fast food image.
Honestly, I still wouldn’t be a buyer of this restaurant sector stock.
YUM! Brands & Restaurant Stock Alternatives
There are alternative restaurant sector plays that offer more growth and upside. Recently, I talked about contrarian restaurant sector play Ruby Tuesday, Inc. (NYSE/RT), so that might be one restaurant stock to watch.
Chart courtesy of www.StockCharts.com
In the large-cap space, YUM! Brands, Inc. (NYSE:YUM), the operator of KFC, Taco Bell, and Pizza Hut, which I call the “triple-bypass specialty,” is making positive waves.
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