McDonald’s Corp. (NYSE: MCD) has enjoyed the status of being the greatest restaurant story in history.  In our lifetime, or in any for that matter, the company grew from a start-up to a Dow Jones Industrial Average component with over 32,000 restaurants in its global empire.  But what gets interesting is that McDonald’s is not just the world’s largest restaurant chain.  McDonald’s has roughly seen its share price double in the last five years and now the stock is effectively worth as much as the entire public universe of restaurant chains in the United States.  The tally is about $72.5 billion for the rest of the public restaurant universe versus about $69.8 billion for that of McDonald’s.  This begs a question…. Can McDonald’s keep growing in this manner?

We tallied up the likes of Yum! Brands, Inc., (NYSE:YUM), Starbucks Corp. (NASDAQ: SBUX), Darden Restaurants, Inc., (NYSE: DRI), Chipotle Mexican Grill, Inc. (NYSE: CMG), Tim Horton’s Inc. (NYSE: THI), Wendy’s/Arby’s Group, Inc. (NYSE: WEN), Burger King Holdings Inc. (NYSE: BKC), Panera Bread Co. (NASDAQ: PNRA), Brinker International Inc. (NASDAQ: EAT), Jack in the Box Inc. (NASDAQ: JACK), Buffalo Wild Wings Inc. (NASDAQ: BWLD), Papa John’s International Inc. (NASDAQ: PZZA), Sonic Corp. (NASDAQ: SONC), and Domino’s Pizza (NYSE: DPZ).

And there are more than twice as many public restaurant and dining companies not reviewed for the restaurant chain tally and more which we showed in the chart of the restaurant and dining stocks.  As far as the restaurant counts?  That is not even close either.  The above named restaurant chains have a combined tally of about 110,000 stores versus the 32,000+ from McDonald’s.  Not even close, at least when you consider the nominal figure.  This is one of those extraordinary moments in time where there almost exists the world’s greatest investment conundrum…. A value trap against its universe of peers, yet a value trap that still manages to represent growth a reasonable price and is still attractive to many investors.  This also may end up setting one of the world’s greatest and most difficult pairs trades ever.

McDonald’s is the leading global food service retailer.  It has more than 32,000 local restaurants and has stores in more than 100 countries. The company has a company-owned model and a franchise model, but about 80% of McDonald’s restaurants worldwide are owned and operated by franchisees.  2010 revenue estimates are $23.8 billion and 2011 revenue estimates are $24.6 billion; earning estimates are $4.43 EPS and $4.82 EPS for the same respective periods.  The golden arches also has one of the more impressive dividend payouts with a yield of about 3.4% now and it has ample dividend coverage to continue hiking its payouts.

Yum! Brands, Inc., (NYSE:YUM), based in Louisville, Kentucky, is actually the world’s largest restaurant company in terms of system restaurants, with more than 36,000 restaurants in over 110 countries and territories. Its value is a far distant #2 in market cap at almost $16 billion.  Revenues were in excess of $11 billion in 2008. Four of the Company’s restaurant brands are KFC, Pizza Hut, Taco Bell and Long John Silver’s.  The revenue estimates for 2010 are about $11.1 billion and for 2011 are about $11.46 billion.  Its dividend payout is close to 2.5% and it too has room for dividend growth ahead on its coverage.

Starbucks (NASDAQ: SBUX) was one of the greatest growth stories as well, up until recent years when growth turned into maturity and then into value.  The coffee giant operates in all 50 states and D.C. and lists 7,087 company-operated stores and 4,081 licensed stores.  It also operates in 43 countries outside the United States and there it counts company-operated stores as 1,796 stores throughout Australia, Canada, Chile, China (Northern China, Southern China), Germany, Ireland, Puerto Rico, Singapore, Thailand and the United Kingdom.  On an international basis it lists its joint venture and licensed stores as 2,792 stores.  We tally the Starbucks universe as roughly 16,000 per the company’s figure when you tally up the JV and licensed stores with its company-owned stores.  Starbucks has not yet paid a dividend.

Darden Restaurants, Inc., (NYSE: DRI) headquartered in Orlando, Florida, is the world’s largest company-owned and operated full-service restaurant company with over $7.2 billion in annual sales and about 180,000 employees.   Its restaurant brands — Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52 — have more than 1,700 locations combined.  2010 estimates sales are $7.1 billion and almost $7.5 billion expected in 2011.

Chipotle Mexican Grill (NYSE: CMG), or what we used to call McMex because it used to be owned by McDonald’s before it was spun off, has 830 restaurants and is still growing.  It opened 121 new restaurants in 2009 and sees 120-130 new restaurant openings in 2010.  Chipotle is expected to post $1.7 billion in 2010 revenues with estimates of over $1.9 billion in 2011.  As it is in growth mode, it has also not paid a dividend.

Tim Horton’s (NYSE: THI) is the fourth largest publicly traded quick service restaurant chain in North America based on market capitalization, and the largest in Canada. Tim Hortons appeals to a broad range of consumer tastes, with a menu that includes premium coffee and donuts, flavored cappuccinos, specialty teas, home-style soups, fresh sandwiches, wraps and fresh-baked goods. As of late 2009, Tim Hortons had 3,527 system wide restaurants, including 2,971 in Canada and 556 in the United States.  Its 2010 sales expectations are $2.25 billion.

Wendy’s/Arby’s Group, Inc. (NYSE: WEN) is the nation’s third largest quick service restaurant company and is comprised of the Wendy’s and Arby’s brands with about $12 billion in system-wide sales per the company figure.  A trailing 4-quarter period is closer to $4 billion.  It also listed that its owns or franchises over 10,000 restaurants.  The dividend here was low at 1.2%.

Burger King Holdings Inc. (NYSE: BKC) operates more than 12,000 restaurants in all 50 states and in 73 countries and U.S. territories worldwide. The company noted that about 90% of BURGER KING® restaurants are owned and operated by independent franchisees, many of them family owned operations that have been in business for decades.  Growth has been harder to come by and its public company history has been mixed due to a private equity ownership before its IPO.  Expected sales for 2010 are about $2.55 billion vs. $2.66 billion for 2011, and its dividend yield is approximately 1.4%.

Panera Bread Company (NASDAQ: PNRA) owns and franchises 1,380 cafes as of December 29, 2009 under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Café stores.  The company is targeting about 80 to 90 new unit openings in fiscal 2010. Average weekly sales for new Company-owned units is targeted to be between $36,000 to $38,000 in fiscal 2010.  Sales are expected to be about $1.5 billion in 2010 and $1.65 billion in 2011.

Brinker International (NYSE: EAT) listed that it either owned, operated, or franchised 1,712 restaurants under the names Chili’s Grill & Bar (1,504 restaurants), On The Border Mexican Grill & Cantina (163 restaurants) and Maggiano’s Little Italy (45 restaurants). Brinker also holds a minority investment in Romano’s Macaroni Grill(R).  Its revenue growth has also matured and sales for both 2010 and 2011 are expected to be close to $3.2 billion.  Its dividend payout is close to 2.4%.

Jack in the Box Inc. (NASDAQ: JACK), based in San Diego, is a restaurant company that operates and franchises Jack in the Box® restaurants with more than 2,200 restaurants in 18 states. Additionally, through a wholly owned subsidiary, the company operates and franchises Qdoba Mexican Grill®, a leader in fast-casual dining, with more than 500 restaurants in 42 states and the District of Columbia.

The Cheesecake Factory (NASDAQ: CAKE) operates 161 full-service, casual dining restaurants throughout the U.S., including 147 restaurants under The Cheesecake Factory(R) mark; 13 restaurants under the Grand Lux Cafe(R) mark; and one restaurant under the RockSugar Pan Asian Kitchen(R) mark.

Bob Evans Farms, Inc. (NASDAQ: BOBE) owns and operates full-service restaurants under the Bob Evans and Mimi’s Café brand names. At the end of the third fiscal quarter (Jan. 22, 2010), Bob Evans owned and operated 569 family restaurants in 18 states, primarily in the Midwest, mid-Atlantic and Southeast regions of the United States, while Mimi’s Café owned and operated 146 casual restaurants located in 24 states, primarily in California and other western states. Bob Evans Farms, Inc. is also a leading producer and distributor of pork sausage and a variety of complementary homestyle convenience food items under the Bob Evans and Owens brand names.

Papa John’s International Inc. (NASDAQ: PZZA), based in Louisville, Kentucky, Papa John’s International, Inc. (NASDAQ: PZZA) is the world’s third largest pizza company. Papa John’s operates and franchises more than 3,000 delivery and carry out pizza restaurants worldwide.  Sales estimates are $1.1 billion in 2010 and $1.14 billion for 2011.  The company said that projected 2010 worldwide net new unit openings of 140 to 180 (40 to 60 net openings for domestic and 100 to 120 net openings for international).

P.F. Chang’s (NASDAQ: PFCB) is comprised of about 363 locations, with its brands broken down as 197 PFChang’s stores and 166 Pei Wei Asian Diner brand stores.  The company recently initiated a dividend and said it would begin targeting 40% of its income for payouts.  Sales expectations are about $1.23 billion in 2010 and $1.3 billion in 2011.

Texas Roadhouse (NASDAQ: TXRH) is a casual dining concept that first opened in 1993 and today operates more than 196 restaurants in 36 states. Sales expectations for 2010 are about $981 million and then about $1.07 billion in 2011.

Buffalo Wild Wings (NASDAQ: BWLD) is the operator and franchisor of restaurants with over 575 restaurants in 40 states. Its menu competitively priced between the fast casual and casual dining segments. Over the next several years it intends to open many company-owned and franchised restaurants in new and existing markets.  Sales for 2010 are expected to be about $631 million and for 2011 about $755 million.

Sonic Corp. (NASDAQ: SONC) has more than 3,500 drive-ins from coast to coast and is the nation’s largest chain of drive-in restaurants.  Sales are expected to be $581 million in 2010 and $598 million in 2011.

CEC Entertainment. Inc. (NYSE: CEC), parent of Chuck E. Cheese, was originally incorporated under the name Showbiz Pizza Place.  Presumably the company meant to say 2010 as this was a FEB-2010 press release but it listed 2007 and most recently said it consisted of 484  company-owned and operated Chuck E. Cheese’s restaurants and 45 franchise restaurants. The company operates in 48 states and 5 countries. 2010 sales are expected to be almost $820 million in 2010 and $847 million in 2011.

CKE Restaurants, Inc. (NYSE: CKR) is now about to be acquired in the first private equity deal in some time for a large food chain.  It franchises, licenses, and operates quick-service and fast-casual dining stores under the Carl’s Jr., Hardee’s, Green Burrito and Red Burrito restaurant brands. The CKE system includes more than 3,000 locations in 43 states and in 13 countries.

Domino’s Pizza (NYSE: DPZ) is perhaps the most recognized name in pizza delivery with a locally owned and operated franchised system.  The company lists that its operates a network of 8,886 franchised and company-owned stores in the United States and 60 international markets. Sales are expected to be $1.4 billion or so in 2010.

DineEquity, Inc. (NYSE: DIN) is a hard chain to cover now as it successfully completed the acquisition of Applebee’s International, Inc. for $25.50 per share in cash, representing a total transaction value of approximately $2.1 billion, in 2007. With more than 3,300 restaurants, it is the combination of Applebee’s and IHOP.  It also listed that the IHOP system is 99% franchised.  That is part of the market discrepancy here for the old deal size versus the market cap today of only $500+ million.  2010 sales expectations are about $1.35 billion.

There is of course much more than the ones covered above.  The idea is not to just throw up some names and stats.  We want to show how broad the non-McDonald’s universe is and at least throw up some common representations.  If we tally up all of these store counts listed above and do not even list the other chains not yet covered, then the universe is roughly 110,000 other restaurant stores.  If you started to count companies which have gone private the universe is far larger.

Applebee’s used to be much larger in market cap compared to its new model before it was bought.  Lone Star Steakhouse & Saloon, Inc. went private in a total value of the transaction of over $600 million.  Hooters of America, Inc. is the Atlanta-based operator and franchiser of over 450 Hooters locations in 43 states. The privately held corporation owns 122 units.  Dunkin Donuts is also privately owned.  When you consider the income that many established chains kick off, it seems that the private equity bonanza and that the management buyout model may always be interested in these plays.  CKE just got a bid last week (its new price not updated) and Landry’s has been in a go-private deal twice.

All this begs a question… What tricks does McDonald’s have up its sleeve?  For starters, you already saw Chipotle get started and then spun-out of McDonald’s.  Are there any laws against McDonald’s trying out new concept restaurants?  No.  Even in a very strict antitrust universe it is only an issue of ‘big market cap’ that McDonald’s rules America’s belly stocks.  There are many popular theme chains McDonald’s could try to embark on.  What about McChang’s?  What about McPizza?  Do I dare say McFish or McSushi? or McTapas?  Or what about McDog’s?  What about McChick?  You get the idea.  The food chain is in theory not immune to McDonald’s as a threat against almost any niche.

McDonald’s has what looked to be the most solid dividend of all its peers and has room to grow its dividend.  The company is recession-proof, more or less.  It is also a defensive stock and still offers growth.  The company has withstood the tests of time.  It just gets hard to not notice the price that the market is putting on its stock versus the rest of the restaurant universe.

We have included a basic chart here showing the comparable values of McDonald’s versus peers.  We have listed prices as of last week with a market cap, the percentage change from 52-week lows, the 52-week trading range of the stock, a trailing P/E ratio, a forward P/E ratio for 2010, a Price/Sales figure and a Price to book value ratio.

Name	Tick	Trade	Mkt Cap	Low Gains	52-wk Range	P/E	P/E10	P/S	P/B
McDonald’s Corp	MCD	$64.74	69.87	Up 28.35%	50.44 – 65.75	14.61	13.43	3.06	5.28
Yum! Brands, Inc.	YUM	$33.79	15.85	Up 44.59%	23.37 – 36.96	14.08	12.56	1.46	15.4
Starbucks Corporation	SBUX	$23.36	17.37	Up 187.68%	8.12 – 24.45	21.05	18.54	1.75	5.18
Darden Restaurants, Inc.	DRI	$41.05	5.74	Up 70.26%	24.11 – 41.21	14.4	13.12	0.79	3.3
Chipotle Mexican Grill Inc	CMG	$104.99	3.31	Up 119.23%	47.89 – 106.49	23.7	20.19	2.16	4.65
Tim Hortons, Inc.	THI	$30.23	5.46	Up 35.38%	22.33 – 31.00	19.25	15.99	2.58	4.61
Wemdy’s/Arby’s Group	WEN	$4.90	2.27	Up 38.03%	3.55 – 5.78	N/A	N/A	0.63	0.94
Burger King Holdings Inc	BKC	$18.25	2.47	Up 16.91%	15.61 – 24.10	13.13	11.7	0.98	2.26
Panera Bread Company	PNRA	$73.84	2.33	Up 74.56%	42.30 – 74.79	21.72	18.55	1.72	4.14
Brinker International, Inc.	EAT	$18.25	1.87	Up 89.12%	9.65 – 20.09	13.04	12.17	0.58	2.81
Jack In The Box Inc.	JACK	$20.45	1.17	Up 23.27%	16.59 – 28.35	10.38	9.42	0.48	2.24
The Cheesecake Factory	CAKE	$23.65	1.42	Up 245.76%	6.84 – 24.15	19.23	16.54	0.89	2.74
Bob Evans Farms, Inc.	BOBE	$28.61	0.871	Up 77.26%	16.14 – 32.84	12.72	11.77	0.51	1.39
Papa John’s International	PZZA	$23.02	0.65	Up 20.52%	19.10 – 29.25	15.77	12.72	0.59	3.46
P.F. Chang’s China Bistro	PFCB	$41.88	0.969	Up 147.08%	16.95 – 42.71	20.84	18.45	0.81	2.91
Texas Roadhouse, Inc.	TXRH	$13.06	0.918	Up 74.13%	7.50 – 13.29	20.09	18.66	0.96	2.22
Buffalo Wild Wings, Inc.	BWLD	$42.78	0.772	Up 46.61%	29.18 – 48.73	20.87	17.25	1.42	3.64
Sonic Corp.	SONC	$8.40	0.513	Up 38.84%	6.05 – 12.63	12.35	10.77	0.77	154.55
Cracker Barrel Old Country	CBRL	$39.86	0.912	Up 130.94%	17.26 – 41.57	12.19	11.2	0.39	5.98
CEC Entertainment, Inc.	CEC	$34.68	0.788	Up 77.85%	19.50 – 35.53	12.99	12.43	0.97	4.41
CKE Restaurants, Inc.	CKR	$8.90	0.491	Up 57.52%	5.65 – 11.52	13.48	11.41	0.33	2.15
Dominos Pizza Inc.	DPZ	$12.28	0.717	Up 157.98%	4.76 – 12.50	14.98	13.2	0.52	N/A
Ruby Tuesday, Inc.	RT	$7.94	0.512	Up 834.12%	0.85 – 9.38	13.46	11.03	0.43	1.01
Peet’s Coffee & Tea, Inc.	PEET	$37.26	0.488	Up 93.16%	19.29 – 42.20	28.88	23.73	1.62	2.92
BJ’s Restaurants, Inc.	BJRI	$21.47	0.574	Up 108.85%	10.28 – 22.91	33.03	27.53	1.36	2.27
DineEquity Inc	DIN	$28.08	0.493	Up 435.88%	5.24 – 34.71	12.76	14.47	0.35	6.48
California Pizza Kitchen	CPKI	$15.07	0.364	Up 60.15%	9.41 – 17.44	20.09	17.32	0.52	1.75
Steak n Shake Co. (The)	SNS	$348.26	0.5	Up 253.92%	98.40 – 357.87	22.01	19	0.78	1.69
Red Robin Gourmet Burgers	RRGB	$20.02	0.311	Up 69.80%	11.79 – 26.44	14.83	13.35	0.35	1.03
Denny’s Corporation	DENN	$2.71	0.261	Up 135.65%	1.15 – 3.10	11.78	7.97	0.39	N/A
Krispy Kreme Doughnuts	KKD	$3.45	0.232	Up 219.44%	1.08 – 4.75	N/A	N/A	0.66	3.79
O’Charley’s Inc.	CHUX	$8.38	0.175	Up 345.74%	1.88 – 11.41	44.11	18.62	0.2	0.84
Einstein Noah Restaurant	BAGL	$11.88	0.194	Up 186.27%	4.15 – 14.44	16.73	12.51	0.5	3.49
Landry’s Restaurants, Inc.	LNY	$20.50	0.33	Up 469.44%	3.60 – 22.88	N/A	32.54	0.32	1.03
Carrols Restaurant Group	TAST	$6.78	0.146	Up 169.05%	2.52 – 8.18	6.46	6.4	0.19	5.56
Frisch’s Restaurants	FRS	$23.40	0.119	Up 25.60%	18.63 – 32.21	12.12	12.38	0.39	0.98
Luby’s, Inc.	LUB	$3.53	0.098	Up 9.29%	3.23 – 5.88	N/A	N/A	0.35	0.62
Benihana Inc.	BNHNA	$4.99	0.076	Up 219.87%	1.56 – 8.38	N/A	N/A	0.24	0.48
Jamba, Inc.	JMBA	$1.68	0.088	Up 380.00%	0.35 – 2.19	N/A	N/A	0.29	3.34
Caribou Coffee Company	CBOU	$7.15	0.141	Up 414.39%	1.39 – 9.38	23.83	15.54	0.56	2.99
McCormick & Schmick’s	MSSR	$8.75	0.129	Up 499.32%	1.46 – 9.45	29.17	23.65	0.36	1.22
Ruth’s Hospitality Group	RUTH	$3.82	0.092	Up 445.71%	0.70 – 4.74	13.17	11.94	0.25	2.01
Morton’s Restaurant Group	MRT	$4.30	0.076	Up 175.64%	1.56 – 4.97	86	21.5	0.24	0.92
Nathan’s Famous, Inc.	NATH	$15.04	0.084	Up 35.86%	11.07 – 16.18	15.35	14.75	1.71	1.91
Rubio’s Restaurants, Inc.	RUBO	$7.60	0.076	Up 150.76%	3.03 – 8.18	69.07	44.69	0.4	1.57
Famous Dave’s	DAVE	$6.64	0.061	Up 232.00%	2.00 – 7.25	10.71	9.35	0.47	2
Total Restaurant Mkt Cap			$142.35
Total, Minus McDonald’s			$72.48

Stay tuned. We plan to update this as an ongoing feature ahead.

JON C. OGG

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