Why Morgan Stanley Says Buy Burger King and Sell McDonald’s

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An analyst at Morgan Stanley has kicked off the week with an upgrade to Overweight for Burger King Worldwide Inc. (NYSE: BKW) and a downgrade to Equal Weight for McDonald’s Corp. (NYSE: MCD). Morgan Stanley’s price target for Burger King is $38, and the price target for McDonald’s has been lowered from $102 to $96.

Burger King’s proposed acquisition of Tim Hortons Inc. (NYSE: THI) combined with a tax inversion plan that would redomicile Burger King in Canada adds about 200 basis points to the company’s prospects for international growth, according to one report.

Same-store sales rose 0.9% in the second quarter at Burger King, while McDonald’s second-quarter same-store sales were essentially flat. Adding Hortons’ business could be a significant plus for Burger King. Morgan Stanley’s analyst sees the tie-up generating near-term savings of $175 million.

The principal owner of Burger King is 3G Capital, which issued about 16% of the company’s stock in an IPO in June of 2012. The big buyer at the time was Bill Ackman. Burger King is also getting help financing the Hortons deal from Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A). 3G also partnered with Buffett in its $28 takeover of Heinz & Co. in 2013. The Morgan Stanley analyst also likes 3G Capital’s track record.

Of course it is harder for McDonald’s, the behemoth of the quick-service restaurant business, to do something that will have an impact on growth. And the company is the target for wage increases from food service workers and some franchisees are very unhappy about new costs that have been imposed by the corporation. McDonald’s may make Happy Meals, but it’s not an entirely happy place.

McDonald’s has struggled to come up with something that will stop the revenue declines. So far the company’s best strategy has been to keep paying — and increasing — its dividend. The Golden Arches’ dividend yield is now 3.6%, compared with Burger King’s 1.1%. This is one area where McDonald’s lead is not in any danger.

Shares of Burger King were up about 3.3% in the first hour of trading Monday, at $30.73 in a 52-week range of $18.86 to $34.20.

McDonald’s shares traded down about 0.9%, at $94.03 in a 52-week range of $90.53 to $103.78.

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