“Here’s that second chance… The Next McDonald’s”

By Travis Johnson, Stock Gumshoe, June 29, 2011

Yiannis Mostrous teased us well over a year ago about the stock that he thought was “the next McDonald’s” … and readers are telling me that he’s sending out a very similar ad campaign right now, so I thought I’d take a look.

At the time, Mostrous was looking for subscribers to his Silk Road Investor, but that newsletter has since been renamed the Global Investment Strategist (and repriced, too — what was $399 is now $495), though apparently the letter is different enough that he’s pitching folks on “charter subscriptions” to make you feel like you’re getting in on the ground floor of something exciting.

As opposed to getting a stock recommendation that he first teased back in April 2010. Now, to his credit the stock has at least gone up during that 15 months — so … what is it?

Well, I hate to bury the lead … but let’s see how he teases it first, shall we? Don’t worry, I’ll be quick!

“Thousands of investors became millionaires and lived their dreams as 100 shares of McDonald’s split 12 times and turned into a 74,360 shares! But this growth stock can be be even BIGGER than McDonald’s…”

And despite the fact that he used exactly those same words over a year ago, he still calls this top-secret … and “new” … in his words:

My Top-Secret New Stock Recommendation

“McDonald’s is the first name that comes to your mind when someone asks about fast-food restaurant. However, if you ask the same question in the Philippines (and perhaps in Southern California), the answer that you’ll get will be very different.

“My top-secret new stock recommendation may not be a household name when it comes to the global market yet. But in the Philippines, it’s the undisputed king of the burger market.

“The rivalry between my top-secret new stock recommendation and McDonald’s looks like no contest at first glance. McDonald’s has more than 31,000 outlets in more than 100 countries, out of which 3,000 outlets are in Asia. My top-secret new stock recommendation has only 600 outlets and over 50 international outlets.

“But in the Philippines, my top-secret new stock recommendation has humbled the global giant. This future darling of emerging market hedge funds and mutual funds has captured more than 75% share of the hamburger market in the Philippines. This is more than half of the fast-food market as a whole and about twice McDonald’s sales in the country. Its revenues are growing rapidly and profitably.

“Bottom Line: My top-secret new stock recommendation is the undisputed king of the fast-food market in the Philippines. And it’s rapidly challenging McDonald’s here in the U.S. by expanding its presence in Southern California.”

And yes, that little spiel is pretty much word for word how he teased this same company last year — though the snippets about Southern California are new, so perhaps the company is putting more emphasis on that business.

So I’ll just go ahead and tell you the name of the stock, since you’re still so nicely sitting at rapt attention: This is Jollibee (JBFCF on the pink sheets, home trading is on the Philippine Stock Exchange at JFC)

And if you missed the tease the first time around, the pitch is basically the same — this company tailors to the specific tastes of their customers, and that’s how they clobbered McDonald’s at home in the Philippines (that’s more or less a “best practice” of global fast food now, with most companies trying to tailor their products to local consumers — you could say the same thing, for example, about Yum Brands in China — which offers very different recipes at Pizza Hut and KFC in the Middle Kingdom than they do in Ames, Iowa).

Here’s how Mostrous describes this “secret advantage:”

“Their secret is Smart Niching, or concentrating on serving the unique tastes of Filipino consumers, whereas McDonald’s exports largely standardized fare to consumers around the world. Their menu and flavors are specially suited to Filipino tastes. The local chain cooks up sweet, spicy burgers and serves seasoned chicken and spaghetti with sweet sauce, the way Filipinos like it….

“Their mascot with orange jacket and the blonde spaghetti-haired girl are better known and loved in the Philippines than Ronald McDonald.

Although my top-secret new stock recommendation is much smaller than McDonald’s in global terms, they concentrate most of their resources within the Philippines, where their restaurants outnumber McDonald’s. But their primary advantage comes from simply doing a better job of giving consumers what they want.

In the Philippines, and even in some key neighborhood markets in Southern California, my top-secret new stock recommendation has taken over the reign of McDonald’s. Sales and revenues have exploded in the past 24 months.”

The company is pretty big, with a market cap of about US$2 billion, and the stock trades actively in the Philippines, but if you’re interested in this one do be careful … trading on the pink sheets is very light and the price could easily get out of whack with the “real value” on the Philippine Exchange.

The current exchange rate is roughly 2.3 pennies (US) to the Peso, so at the last close in the Philippines at 86 Pesos the fair price would be $1.97, and the last price on the pink sheets was at $1.93 … so it’s roughly in line with where it should be trading at the moment — that’s not always the case.

It’s also not necessarily a cheap company — they’ve done well for a couple years now, and the stock is up nicely from when Mostrous first started teasing it in 2010. He pitched it when it was around 57 Pesos — so the shares are up something like 50%, about twice the return that you would have seen from the big fast food players like MCD or YUM, both of which have seen returns that pretty closely match the S&P 500 over that time period (YUM did a bit better, but not dramatically so). You would have been far better off with my favorite smaller emerging market burger play (Bob’s, which I wrote about for paying members also about 15 months ago, and which is now the strongest performing idea for the Irregulars), but certainly that ain’t bad.

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During that time that the shares have gone up by about 50%, though, the trailing earnings per share, per Bloomberg, have only gone up by about 15% (2.61 pesos then, 3.01 now), so the PE ratio is now substantially higher — you’ll pay almost 30X trailing earnings now if you wish to buy Jollibee. The last quarter did not look particularly fabulous, with revenues still kicking in at a 15% growth rate but income per share falling by about 10% year over year.

With cost pressures and an arguably saturated business in the Philippines, the growth kicker for Jollibee and it’s restaurants is definitely coming from international stores, which does include the US with about 20 stores in California and a handful elsewhere, as well as areas with Filipino expatriate potential like Hong Kong, Brunei, and Qatar, and, of course, the place where every restaurant dreams of empire: China.

And they’ve also continued to expand in the Philippines by acquisition — they bought the barbecue chicken chain Mang Inasal late last year, significantly increasing their store count (though Mostrous teases just 600 outlets, with 50 overseas, if you include all of their brands, franchises and outlets the store count now stands at 2,338 … with 51 new additions in just the first quarter).

The basic info on Jollibee is available from the Philippine exchange site here, or from the company’s own investor relations site here. It’s an interesting story, though a business that also faces a substantial squeeze (rising costs for everything on one end, and a value proposition for customers that pressures their ability to raise prices) — but they are growing global sales, and they have also grown earnings in recent years (though not in the most recent quarter).

Sound like your kind of thing? I see some “story” to like, though I frankly still like my Brazilian burger stock better … and I even feel a bit more positive about the other stock Mostrous has been teasing lately, the Singaporean conglomerate Keppel Corp. It’s your money, though, so let us know what you think with a comment below.

And if you’ve every subscribed to Global Investment Strategist, you might be the first to review it over at Stock Gumshoe Reviews if you click here (thanks!)