Investors looking for a place to ride out the stock market storm might want to use their stomachs as their investment guide, some analysts believe.
Thanks to a weak dollar and strong overseas sales, both
reported better-than-expected earnings this week.
Several analysts believe that if the dollar stays weak, revenue for the fast-food chains could continue to grow.
"They're clearly more defensive stocks than many names in the industry, but they're not as defensive as a consumer staple," said Michael Sherrick, an analyst with Morgan Stanley.
Sherrick rates McDonald's as an underweight, and Yum!, the owner of Pizza Hut, KFC and Taco Bell, as an overweight. Morgan Stanley has done underwriting work for McDonald's and continues to pursue investment banking work for most companies that the brokerage firm follows.
About one-third of McDonald's operating income comes from Europe, while one-half comes from the U.S. Though second-quarter sales were weak in Latin America, decreasing about 16% from the second quarter of 2001, Sherrick said European sales, which were up 7%, more than made up for the Latin American losses.
Yum! doesn't have the international presence that McDonald's holds, but in a research report on the company, Andrew Barish of Banc of America Securities called Yum!'s international business "underappreciated" and said it constituted about one-third of pretax profits.
Though both McDonald's and Yum! have experienced losses recently, Howard Penney with SunTrust Robinson Humphrey pointed out that virtually all large-cap stocks have been hurt. The weaker dollar, however, "should help mitigate some of the turbulence in the stock market," he said. SunTrust doesn't do any equity underwriting work for either company.
Penney also characterized McDonald's and Yum! as safety stocks because of their transparency. They are both cash businesses with little capital and clean balance sheets. They both generate cash flow, and neither has any accounting issues because they've grown organically as opposed to relying on acquisitions.
At the same time, McDonald's and Yum! have their risks. Yum!'s Pizza Hut, "continues to be a laggard. And it won't be a quick fix," Sherrick said, adding that the pizza business is extremely competitive. Same-store Pizza Hut sales decreased 3% in the second quarter.
McDonald's, meanwhile, only saw 1% domestic growth, and Penney contended the company is still in a "turnaround stage."
Mark Kalinowski, an analyst for Salomon Smith Barney, noted in his research report that total sales, excluding the effects of foreign currency translation, were up only 2%, versus a rise of 3% in the first quarter. Asia-Pacific region sales declined 6%.
"In general, these figures do not help us gain any more added confidence in McDonald's ability to generate the type of sales growth we'd ideally like to see for us to strongly consider an upgrade of the stock," he wrote in the research note. "We do not expect McDonald's to achieve a higher multiple until same-store sales performance accelerates in the U.S." He has assigned a neutral rating to McDonald's.
On Wednesday at least, McDonald's failed to impress Wall Street. The stock had the distinction of being the only member of the
Dow Jones Industrial Average
to close in negative territory, down 7 cents, or 0.3%, to $23.77. Yum! fared better, jumping $3.73, or 14.8%, to $28.88.