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McDonald’s, Yum stocks hit all-time highs

Analysts cite global strength, product innovation, refranchising

Share prices at two of the world’s largest restaurant companies, McDonald’s Corp. and Yum! Brands Inc., reached all-time highs during trading this week, as the companies benefited from investor favor surrounding global operations as well as takeover talk involving their quick-service competitors.

Louisville, Ky.-based Yum Brands closed Friday at $48.85 after hitting a new high of $48.90 during trading. The operator and franchisor of more than 37,000 restaurants worldwide — including Pizza Hut, Taco Bell and KFC — reported third-quarter profit increase last week, as well as an increased outlook for the full year.

J.P. Morgan securities analyst John Ivankoe wrote in a research note Thursday that Yum’s stock still has plenty of upside, given the strong performance of its system in China and the potential for refranchising in the United States.

“The company has one of the premier investable consumer franchises in China, with the country representing 37 percent of fiscal-2010 operating income,” Ivankoe wrote.

He added that a potentially higher valuation for the U.S. business could add even more to the company’s attractiveness to investors and that, “in our view, the aggregate value supports further increases in Yum’s all-time-high stock price.”

Ivankoe further noted that, by the end of 2011, Yum plans to maintain a U.S. system that is 90 percent franchised, cutting company ownership of Pizza Hut and KFC from the current levels of 11 percent and 17 percent, respectively. Yum currently owns about 24 percent of the Taco Bell system in the United States, Ivankoe wrote, “and we believe it has no intention to sell this high-returning, differentiated brand.”

Meanwhile, Oak Brook, Ill.-based McDonald’s share price closed Friday at $77.48 after hitting a new high of $77.77 during trading. The parent to the more than 32,000-unit chain recently increased its quarterly dividend 11 percent to 61 cents per share, and it has reported global same-store sales increases of 7 percent in July and 4.9 percent in August.

In a recent note that followed meetings with McDonald’s management team, RBC Capital Markets securities analyst Larry Miller noted that, even though investors should be cautious about the company’s stock valuation in a still-fragile global economy, the Golden Arches strategies are sound.

“Investors are upbeat on McDonald’s balanced growth, its reimaging and new-product strategies, a weakening U.S. dollar, and plans to return cash flow to shareholders,” Miller wrote. “Investors also tend to have positive views on McDonald’s ability to be successful in China,” one of the few areas of the world where consumers have begun to improve their spending.

The RBC analyst also concluded from management meetings that the chain still has room for menu development, even as McDonald’s has been prolific lately by rolling out or testing Chicken Flatbreads, Chicken Grande Wraps and Real Fruit Smoothies.

“Of all the things we heard during our travel with management, we were most surprised to learn there is ample room for product innovation,” Miller wrote. “To many of us, it seems McDonald’s is nearing the end of the road on its successful new-product cycle. However, the company sees ample opportunities to continue to innovate around its new and existing product platforms, including beverages (e.g. frozen lemonades), breakfast, chicken (e.g. improved chicken sandwiches and large wraps), and convenience (e.g. drive-thru optimization).”

The share price spikes for Yum and McDonald’s came amid speculation that the nation’s No. 3 burger chain, Wendy’s, would be the next restaurant brand ripe for a takeover. As reports of the rumor circulated, Wendy’s share price rose 11 percent on Thursday, from a $4.49 open to as high as $4.99, before closing at $4.78, a 6.5-percent increase for the day. On Friday, Wendy’s stock closed at $4.90.

Private-equity interest in the restaurant space has been strong, with deals for Burger King Holdings Inc., Rubio’s Restaurants Inc. and CKE Restaurants Inc.

Contact Mark Brandau at [email protected].

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