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Junk Food Stocks Look Healthy

18 February 2016 in Trading Ideas

Key Takeaways

  • McDonald's all-day breakfast launch last fall helped deliver the company's best growth in four years.
  • Coke is moving fast to shed itself of margin-dragging bottling operations.
  • Motifs mentioned: Junk Foods
  • Stocks mentioned:McDonald's Corp (NYSE:MCD), Wendy's Co (NASDAQ:WEN), Starbucks Corporation (NASDAQ:SBUX), Yum Brands Inc (NYSE:YUM), The Coca-Cola Co (NYSE:KO), PepsiCo Inc. (NYSE:PEP).  

For all the talk about the trends toward nutritious eating, the giants of gastronomy’s lower end seem to have no trouble finding demand for their goodies.

Late last month, McDonald’s Corp (NYSE:MCD) smashed Wall Street expectations for quarterly same-restaurant sales as the launch of all-day breakfasts proved a hit with diners in the US and demand continued to recover in China.1

The performance has helped a revival at the Golden Arches, after the chain had seen US sales fall for two years up to the third quarter of 2015 following a series of missteps under former Chief Executive Don Thompson, who left the world’s biggest restaurant chain last year, according to a Reuters article.

McDonald’s began all-day breakfasts in October in the US, a move aimed at countering increasing competition from chains such as Wendy’s Co (NASDAQ:WEN), Starbucks Corporation (NASDAQ:SBUX) and Burger King , the Reuters said.

Sales at US outlets open at least 13 months rose 5.7% in the quarter ended Dec. 31 – the best quarterly growth in nearly four years and far ahead of forecasts of 2.7%.

In China, where McDonald’s and rival Yum Brands Inc (NYSE:YUM) are still recovering from a 2014 food safety scandal, same-store sales rose 4%, the second straight quarter of growth after four quarters of falling sales.

Meanwhile, McDonald’s partner The Coca-Cola Co (NYSE:KO) also reported healthy US sales growth in the fourth quarter even though it warned a weak global economy and foreign currencies would drag down results in 2016.2

Coke said its profit rose 61% to $1.24 billion from $770 million, after 2014 results were hurt by restructuring charges and a large Venezuelan write-down.

The company’s North American beverage volumes rose 3% in the fourth quarter, including a 2% increase in carbonated drinks. Coke also has been raising prices and selling smaller packages that cost consumers more per ounce, helping fuel its best North American results in three years, according to the Wall Street Journal.

Looking ahead, Coke said it plans to greatly accelerate the restructuring of its North American operations, refranchising distribution and selling roughly 55 soda-bottling plants by the end of next year.

The move will allow the company to focus more on marketing and its more profitable concentrate business, and represents a giant unwinding of Coke’s $12.3 billion acquisition of Coca-Cola Enterprises Inc.’s North American bottling and distribution assets in 2010. That deal gave Coke greater control over its business but hurt its domestic operating margin, which fell to 11.4% in 2014 from 20.7% in 2009.

Coke rival PepsiCo Inc. (NYSE:PEP) said last week that revenue for its North American snacks and drinks units rose in the fourth quarter, boosted by pricing.3

The maker of Frito-Lay chips and Tropicana juice has been retooling its product lineup and rethinking pricing to fetch more money from shoppers. The strategies include the introduction of new lines of Gatorade and Mountain Dew Dewshine, which comes in glass bottles that people might fetch a higher price.

As the Associated Press pointed out, the focus on finding novel ways to extract more money from shoppers comes as major packaged food and beverage makers face slowing growth in saturated markets like the US. Coke has been pushing its mini-cans that are seen as more premium offerings, and even featured the 7.5-ounce can in its Super Bowl ad.

Both Coke and Pepsi are also slashing costs and investing more in marketing, which they say helps justify higher prices and drives sales, the AP said.

PepsiCo said cost-cutting helped it to grow its profit by 31% to $1.72 billion. Revenue fell 7% to $18.59 billion, due to a hit from foreign exchange rates on international sales. But that topped the $18.52 billion analysts expected.

Investors of McDonald’s, Coke and Pepsi have all enjoyed a boost to their shares following the company’s respective earnings: McDonald’s is up 3.5% in the past month, Coke has gained 4.5%, and Pepsi has increased 5%.

Those three stocks comprise a 60% weighting in the Junk Foods motif, which has risen 0.9% in the past month. In that same period, the S&P 500 has increased 0.8%.

Over the past 12 months, the motif has gained 4.6%; the S&P 500 has lost 9.6%.

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  1. Sruthi Ramakrishnan, “McDonald’s wins with all-day breakfast, China back on track,” Jan. 26, 2016, https://finance.yahoo.com/news/mcdonalds-wins-day-breakfast-china-085007965.html, (accessed Feb. 16, 2016).
  2. Mike Esterl, “Coke to Step Up North American Restructuring,” wsj.com, Feb. 9, 2016.
  3. Candice Choi, “PepsiCo’s North American revenue climbs, helped by pricing,” Feb. 11, 2016, https://finance.yahoo.com/news/pepsico-meets-4q-profit-forecasts-115338602.html, (accessed Feb. 16, 2016.