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McDonald's needs some time on Burger King's grill

McDonald's could use some time on Burger King's grill. The $91 billion fast-food chain's stock price has lagged that of its smaller rival. Winning over diners alienated by Burger King's planned move to Canada would not add more than a dash of special sauce to McDonald's sluggish sales. But a serving from Burger King's fat-trimming menu might please shareholders more.

McDonald's is having a rough time. Annual revenue increased just two per cent in each of the past two years. Sales at US restaurants open for more than a year fell 1.6 per cent in the first six months of the year, adding to a slump that began last year in the most important fast-food market.

The stock has now fallen almost 10 per cent since mid-May. Granted, that marked an all-time high. But in the two years since rejoining the public stock market, Burger King has more than doubled. The S&P500 Index has jumped 47 per cent. McDonald's, meanwhile, has gained just five per cent.

There may be some opportunity for the Golden Arches to benefit from Burger King moving across the border after its merger with Tim Hortons. There's already a social media campaign urging patrons to boycott the home of the Whopper. But McDonald's already owns almost a quarter of the roughly $160 billion per year US fast-food-chain market, compared with Burger King's 5.3 per cent, according to Euromonitor. Winning a tenth of its competitor's business would have added just $170 million, or 2.8 per cent, to McDonald's bottom line last year.

Emulating Burger King's fat-trimming skills offers a better recipe for shareholder value. The smaller chain has slashed operating expenses by about 70 per cent since Brazilian private equity group 3G Capital took over in 2010 - largely by cutting headquarters staff and selling company-owned stores.

Burger King still serves up new products and last year generated more than $400,000 of sales per employee, compared to just $63,000 at McDonald's, which still directly owns and operates thousands of restaurants. That's why Wall Street analysts expect Burger King to generate a 62 per cent EBIT margin this year, about double that of McDonald's.

Assume McDonald's could boost its operating margin to 40 percent. That would add $1.7 billion to next year's expected $5.8 billion of net profit and justify a near 30 percent boost in market cap - more, if investors upgraded its current multiple of 16 times 2015 earnings. That's the kind of serving that would make shareholders satisfied.