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The Latest Buzz at McDonald's

FAST FOOD HAS BEEN stuck in the slow lane for the last year.

Shares of McDonald's (ticker: MCD) are up just 3.6% over the last 12 months, while Burger King Holdings (BKC) has fallen 16%. In contrast, the Standard & Poor's 500 index jumped 35% over the same period.

However, Credit Suisse thinks McDonald's could start cooking in short-order though the brokerage firm is less enthusiastic about Burger King. We agree and favor the bigger, high-quality name.

Earlier today, Credit Suisse upgraded McDonald's to Outperform from Neutral and upped its price target to $71 from $69. That call doesn't provide huge upside from a recent $63, but investors should be happy with that return combined with McDonald's attractive 3.5% dividend yield.

Credit Suisse cut Burger King to Neutral from Outperform and expects the stock will be worth $21 a year from now.

McDonald's shares are up 2% on the news to $63.53 -- but Burger King is getting whopped, with shares down 3.3% to $17.88.

Given the rally in lower-quality names over the last nine months, we think now is a good time to refocus attention on solid dividend payers with a dominant global platform. McDonald's fits the bill. The restaurant operator maintained positive-traffic growth in 2009, while the rest of the industry saw declines, says Mitchell Speiser, an analyst at Buckingham Research.

Meanwhile, McDonald's yield bests consumer staples names like Procter & Gamble (PG) and Colgate-Palmolive (CL). Burger King pays a less impressive yield of 1.4%.

On the valuation front, McDonald's and Burger King are both cheaper than the Standard & Poor's. McDonald's fetches just 14.4 times earnings-per-share estimates for 2010. Burger King is even cheaper, with a 12.8 multiple. Still, with its earnings growth expected to stall in 2010, we wouldn't be tempted by Burger King's bargain price.

McDonald's, on the other hand, should get more of a lift from improving beverage sales and a general turn in the economy.

In justifying the upgrade, Credit Suisse analyst Keith Siegner writes: "We do not believe estimates or valuation fairly reflect McDonald's ability to build upon already substantial 2008/2009 share gains through a several-year recovery period…and we believe McDonald's will benefit from its unique ability to simultaneously appeal to both 'depressed' and 'recovering' consumers."

Burger King, on the other hand, Siegner says, is saddled with high expectations following the launch of its $1 "double cheeseburger."

The price change has improved traffic at Burger King but it's not sustainable, according to Buckingham's Speiser. He notes that McDonald's has engineered its dollar-menu offerings to be profitable, while Burger King's double-cheeseburger offering amounts to a temporary price-cut.

"I think consumers like the consistency and every day value at McDonald's, while Burger King is kind of playing games with its dollar menu," Speiser tells Barrons.com.

Speiser rates McDonald's at Buy and Burger King at Neutral. He sees McDonald's shares reaching $78 in the next six to 12 months, largely on the benefits of improving beverage sales. Coffee sales continue to be a significant opportunity for McDonald's. The higher-margin product now accounts for 5% of U.S. sales, up from 2% two years ago, Speiser says. But he sees significant upside, since breakfast represents about a quarter of all U.S. sales.

"They're showing up for breakfast, but most customers are not ordering coffee," Mitchell says. "Just that alone is a good metric of the potential to increase their beverage sales."

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