By Paul R. La Monica

The stock market is suddenly on shaky footing due to worries about tariffs, and there are concerns about the economy losing steam. But it seems that consumers -- and investors -- are taking comfort in good old-fashioned American fast food.

Shares of McDonald's and Yum! Brands, the owner of Taco Bell, KFC and Pizza Hut, both hit new all-time highs Friday. McDonald's stock has gained more than 10% this year, while Yum has soared more than 20%. So much for the popularity of GLP-1 drugs curbing the appetite for burgers and burritos.

But investors may need to be cautious: inflation is continuing to take a toll on consumers. That's why fast food restaurants, which tend to have more lower-income customers, need to keep an even closer watch on menu prices.

McDonald's chief financial officer Ian Borden acknowledged that in the company's fourth-quarter earnings conference call with analysts last month, saying that the company is making "adjustments on value and affordability" to attract more customers. That includes the popular "$5 Meal Deal" and a "Buy One, Add One for $1" menu promotions.

"Our ability to continually evolve to stay ahead of the customer positions us for success in any economic environment," Borden added during the call.

Yum! Brands also stressed its numerous value menu offerings in the U.S. and globally as a reason why it was able to post 8% operating profit growth in the fourth quarter.

Yum chief financial and franchise officer Chris Turner dubbed that "a strong result given the macroeconomic challenges" in its own earnings conference call last month.

So can both stocks continue to rally even as the broader market pulls back on worries about inflation and a slowdown in the job market?

Wall Street expects McDonald's to post same-store sales growth -- which measures the performance of restaurants open at least a year -- of about 2.4% this year, following a slight drop in 2024. And analysts tracked by FactSet are forecasting annual same-store sales gains of about 3% annually for the next few years.

It's a similar story at Yum, with consensus forecasts of same-store sales growth of around 2.5% a year for the next few years, after the company experienced a 1% decline last year.

The problem is that even though both companies are seeking to attract customers hungry for bargain meals, the stocks are trading at prices that are a little higher-end.

McDonald's and Yum each are valued at 24 times earnings estimates for this year, compared to a multiple of about 19 for the S&P 500. To be sure, the two stocks typically trade at slightly higher valuations than the broader market, largely due to their dependable sales and earnings growth. But this is a bigger than usual premium.

With that in mind, analysts are lukewarm on Yum, with only eight of 31 analysts tracked by FactSet recommending the stock as a buy. Two analysts even have it rated an underperform. And the consensus price target of $154.59 is 5% below where the stock closed on Friday. Wall Street is more bullish on McDonald's, with 25 of 40 analysts recommending the Golden Arches as a buy.

But both stocks have some fans on the buy side. Travis Prentice, chief investment officer with the Informed Momentum Company, told Barron's that he likes Yum in large part due to its international growth.

Revenue outside of the U.S. was up 8% in the fourth quarter, compared to a 1% drop domestically. KFC in particular is a big success overseas, with strong sales in the fourth quarter in China, Europe, Latin America, and Australia.

McDonald's also has done well internationally, says Kevin Walkush, a portfolio manager at Jensen Investment Management. Walkush said the firm bought shares of McDonald's in part because it is a good global play.

So it looks like if investors want to take a nibble on McDonald's and Yum at their currently lofty levels, they'll need to bank on continued growth internationally now that there are mounting concerns about a potential consumer slowdown in the U.S.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 08, 2025 13:17 ET (18:17 GMT)

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