Tigress Financial: Buy YUM!, Hold Chipotle and McDonalds (Maybe)

With earnings season roaring, Tigress Financial gave its thoughts on Chipotle CMG, McDonald’s MCD and YUM! YUM. It is worth noting that although Tigress has neutral ratings on Chipotle and McDonalds, only six percent of companies covered have a negative rating.

YUM! - Looking Yummy

YUM! is the highest rated stock in Tigress’s note at strong buy (versus two neutral ratings).

“YUM continues to aggressively expand its store base in China and other emerging markets; we expect growth in emerging markets and in particular China to be the main driver of greater shareholder value,” says analyst Ivan Feinseth of Tigress Financial.

On top of international expansion, the research report points to the launch of Taco Bell’s breakfast menu as key growth catalyst. Same store sales have been a weak spot, to which Feinseth commented, “Taco Bell’s new breakfast menu, which temporarily took away from sales of their higher margin lunch and dinner menu. We believe this weakness will be transient and will positively impact SSS and domestic market share going forward.”

Chipotle - Valuation Stretched

Like most analysts, Feinseth likes Chipotle’s growth, but called the current valuation “unsustainable.” The stock is currently trading at 128 times EV to EP.

Feinseth also pointed out possible headwinds. “Currently strong Key Performance Indicators could start to weaken. Food inflation continues to be a headwind for the company as Beef, Chicken and Avocado prices have all steadily increased, impacting restaurant margins.”

The note sites beef prices at a three year higher and ascending milk, egg and vegetable prices.

Tigress has a neutral rating on Chipotle.

McDonald’s - Challenging Competition

Tigress noted though competition is continuing to put pressure on same store sales and margin. This includes the sudden uprise of fast casual dining (ie. CMG) strong advertising from other fast food chains.

Feinseth writes, “We believe initiatives such as Taco Bell’s (YUM-US, Strong Buy rated) breakfast campaign, which is strongly aimed at MCD’s customers, and efforts by the fast casual segment at the higher end along with expansions to food offerings by convenience stores on the low end will continue to limit MCD’s sales.”

The silver lining of the report is that McDonald’s digital campaign can be a “bright spot” as people look for customization.

Tigress has a neutral rating on McDonalds.