Top Stocks to Buy in Fast Food

By Demitrios Kalogeropoulos Markets Fool.com

Fast-food stock investors endured volatile returns in 2016. Former market darling Chipotle (NYSE: CMG) slumped while industry kingpin McDonald's (NYSE: MCD) grew just slightly. Restaurant Brands, which owns the Burger King and Tim Hortons franchises, trounced rivals by posting a 29% stock price gain. Meanwhile, KFC, Pizza Hut, and Taco Bell operator Yum! Brands (NYSE: YUM) surged higher as it spun off its China business.

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The industry is likely to remain intensely competitive in 2017, and that dynamic will favor companies that have well-established brands and powerful operating strengths. There's also room for disruptors like Shake Shack (NYSE: SHAK)to potentially carve out a significant niche for themselves. Let's take a look at some of the biggest fast-foods stocks and some of the most promising to see which might make attractive buys heading into 2017.

Top fast-food stocks

Fast-Food Stock

Market Cap

Sales Growth

Profit Margin

P/E Ratio

McDonald's

$102 billion

(2%)

31%

23

Yum! Brands

$23 billion

(2%)

17%

23

Chipotle

$11 billion

(14%)

3%

157

Panera (NASDAQ: PNRA)

$5 billion

3%

9%

35

Shake Shack

$1 billion

29%

11%

75

Restaurant Brands

$11 billion

1%

37%

40

Sales growth and profit margin are for the trailing 12 months. P/E = price-to-earnings. Data source: YCharts.

Growth standouts

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Industry growth started out weak in early 2016 and only slowed down as the year progressed. That tough dynamic means comparable-store sales gains -- increasing sales at existing locations -- will be critical to powering long-term investor returns from here.

McDonald's is enjoying a nice rebound on this score thanks to starting all-day breakfast in late 2015. Comps increased 3.5% last quarter, up slightly from the 3.1% mark in the previous quarter, and are on pace to rise by just less than 3% for the full 2016 year. Shake Shack appears set for solid, but not especially strong, growth. The burger joint upstart is forecasting comps up roughly 2.5% in 2017, down from the 4.5% increase it's estimating for this year.

Image source: Panera Bread.

Yet Panera could see some of the industry's best comps in the new year, perhaps on par with the 3.4% increase it posted for the third quarter. After all, the company has invested heavily on initiatives like digital ordering, catering, and delivery while revamping its menu to reflect customer demands for healthier, less processed food.

With the costs of these projects mostly behind them, CEO Ron Shaich and his executive team now can reap the benefits by soaking up market share while sustaining a projected double-digit profit increase in 2017.

Profitability leaders

For the greatest potential for market-thumping earnings growth, consider Yum! Brands and Shake Shack. Yum!'s restaurant-level operating margin is an impressive 22% in its Taco Bell franchise, and its KFC segment is no slouch either, as profitability is up nearly a full percentage point this year, to 15% of sales.

Image source: Getty Images.

Shake Shack is the clear winner in this matchup, though. Restaurant-level profit weighed in at 29% of sales last quarter, which matches Chipotle's peak figures from 2015. The burrito chain's operating margin sank to 14% recently in the wake of its food safety problems.

Shake Shack is still firmly in growth mode, with plans to add 22 new locations in 2017, up from 19 launches in 2016. That means most of its restaurant-level profits will be plowed back into the business. However, with moderate menu-price increases set to roll out over the next few months, Shake Shack could see its leading operating profit tick even higher.

Sticking with the winners

A final recommendation for a top fast-food stock comes under Golden Arches. Investors seeking stable returns can put McDonald's on the top of their watch list. Its cash-generating abilities are unmatched, even during times of stress on the business. Revenue fell 10% in 2015, for example, but operating cash ticked down by only 3% as the fast-food titan produced $4.5 billion of net earnings.

Its heavily franchised business model means it won't ever post the kinds of surging profits that Chipotle did for most of 2015. But that setup also insulates the business from swings in demand, which is how Mickey D's was able to fund a solid boost to its dividend this year following 2015's weak sales results. There are good reasons why McDonald's dominates the fast-food industry decades after its peak store-expansion period. And thesesame factors are likely to allow the company to soak up more than its fair share of fast-food profits in the coming years.

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Demitrios Kalogeropoulos owns shares of Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool is short Shake Shack. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.