The Ban on Trans Fat: How Bad Will It Be for Fast Food Chains?
In this enlightened age of dining, most people know that artificial trans fats are bad. In fact, the FDA has already recommended artificial trans fats from partially hydrogenated oils be removed from the Generally Recognized as Safe (GRAS) additive list. And this month the FDA announced that it plans to ban them altogether.
Restaurant chains, you're on notice.
As Center for Science in the Public Interest (CSPI) executive director Michael Jacobson says, "I hope that those restaurants and food manufacturers that still use this harmful ingredient see the writing on the wall and promptly replace it."
The FDA determination is not yet finalized. There is still a 60 day comment period and then lag time afterwards for an FDA review. But chances are it will come to pass. Consider the FDA Commissioner's writings on the topic. Commissioner Margaret Hamburg has written that no safe level exists for artificial trans fat, and its consumption remains a priority public health concern.
Dripping in trans fats: The worst offenders on the menu
Source: Krispy Kreme website
Restaurant chains still have time to fix the problem. Still, replacing trans fats often takes months of testing oil blends and consumer surveys, as it did for Burger King Worldwide .
It's going to be particularly challenging for companies like AFC Enterprises , owner of Popeye's, and Krispy Kreme Doughnuts . Some of their most popular menu items have unacceptably high levels of trans fat.
AFC Enterprises, the owner of the Popeye's and Popeye's Louisiana Kitchen chains, will have problems with their large cajun fries and 18 piece onion rings, both with 3.5 grams trans fat, and an order of ten chicken livers coming in at 4.5 grams trans fat. According to CSPI, a serving of Popeye's hash browns contains 10 grams of trans fat. Of course to be fair, this is only four menu items.
On Health Magazine's list of worst trans fat offenders, Krispy Kreme took the title as the worst -- not for their doughnuts ( Krispy Kreme doughnuts have no trans fat) but the Krispy Kreme 20 oz Chocolate Chip Cookie Dough Arctic Avalanche with a breathtaking 9 grams of trans fat. This is almost five times the daily amount of trans fats the CSPI recommends.
Still fattening, just not trans-fattening
Live Satisfries launch on the Today Show on Sept. 24
Source: Burger King/NBC
Fast food chains McDonald's and Burger King anticipated they would have to change from trans fats years ago. Burger King switched to trans fat free oil in 2008, but not before they were hit with a CSPI lawsuit in 2007.
Burger King recently introduced Satisfries, advertised as containing 40% less fat, and 30% fewer calories than rival fries at McDonald's. While Satisfries are trans-fat free, they are by no means fat free. One portion serves up 14 grams of fat, of which two grams are saturated fat. This compares to 18 grams of fat, three of them saturated in Burger King's regular fries. As for carbs, don't ask--you don't want to know (ok, it's 51 grams for Satisfries, 58 for regular fries). McDonald's large fries have 25 grams of fat, 3.5 grams saturated.
McDonald's has significantly reduced its trans fat exposure, even eliminating it from its biscuits and apple pies. Those items are now healthier choices then what you get from storebought brands like Marie Callender. There are naturally occurring trans fats in beef and dairy, but it's not something the FDA plans to ban.
You've got to give McDonald's some credit for how much they have "healthified" their menu. None of their fried items have any trans fat, and the only menu items that do are the aforementioned items containing beef or dairy. That's not to say you can't get a full day's calories with a meal of a Double Quarter Pounder with Cheese at 750 calories, a large fries with 500 calories, and a 22 oz. Chocolate McCafe Shake at 850 calories.
A healthy place to park money?
It's a tossup between McDonald's and Burger King for which is the healthier place to eat, but are these better places to park your money than Krispy Kreme or AFC Enterprises?
AFC Enterprises had been a standout performer as a stock over the last year thanks to 14 straight quarters of comparable same store sales growth, remodeling 80% of its locations, strong free cash flow ($33.2 million in Q3), and international growth with the chain now in 26 countries.
However, AFC Enterprises just reported third quarter earnings on Nov. 14 and guided for lower than expected comparable sales growth (although it did beat on both the top and bottom lines, and it expanded its operating margin). The stock closed down 7%.
Meanwhile, Krispy Kreme has also had a straight northeast chart trajectory. It is trading at multi-year highs before it reports earnings on Dec. 2. Analysts have set a high bar of an expected 33% gain in EPS. They may be right based on Krispy Kreme's sizzling international growth, especially in Asia where it opened its first store in Singapore last month. But beware the hot fat here! Krispy Kreme has a rich trailing earnings multiple of 79.56, and in July announced a $50 million share buyback. Even then the company was trading at 52 week highs.
Burger King has turned itself into a 100% franchised chain over the last few years, and this franchise model has led to much higher margins than those of its competitors. It has had an increase of 3,133 basis points in adjusted EBITDA margin (now 70.2%) from the third quarter of 2012 to 2013.
Source: Burger King Q3 earnings presentation
McDonald's, the stalwart Dividend Aristocrat, is the Rodney Dangerfield of fast food: it "just can't get no respect." It offers more than twice the yield of Burger King's 1.4% and is trading at a trailing earnings multiple of 17, half that of Burger King.
McDonald's is not the growth stock that Burger King is, no matter how much healthier the food. With Burger King's direct challenges to McDonald's on a rib sandwich, a lower calorie version of a Big Mac, and the new Satisfries, Burger King is very likely to take some market share.
The tasty trans fat free winner is...
Burger King has the momentum of new menu items and growth in emerging markets, making it the winner of these four names. But if Krispy Kreme pulls back after earnings it may be worth a nibble even if it has all that trans fat in that Arctic Avalanche.
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The article The Ban on Trans Fat: How Bad Will It Be for Fast Food Chains? originally appeared on Fool.com.AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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