Some of the biggest names on Wall Street happen to be major franchise enterprises, and this is hardly a new trend. Individual and institutional investors have been placing their money on franchising operations for decades; in fact, some of the major investment banking firms assign market analysts to closely follow companies that follow the franchise model.
It should not be surprising to learn that some of the most successful franchise operations trading on Wall Street are in the fast food and casual dining sector; after all, this is a market segment that has traditionally enjoyed substantial achievement in terms of branding and marketing. To this effect, we find McDonald’s as one of the 30 companies that make up the vaunted Dow Jones Industrial Average (DJIA), which is the most followed Wall Street barometer around the world. Naturally, McDonald’s is almost synonymous with franchising, and it is a brand that is easily recognized around the world.
Some of the franchise operations that enjoyed healthy runs on Wall Street in 2015 include McDonald’s, Wendy’s, Domino’s, and Panera. Not all franchise leaders in the stock market are dedicated to casual dining; for example, the Travelers Companies provide financial products and solutions that are offered through a franchise model in some markets. There’s also ServiceMaster, which for decades has offered franchise opportunities to carpet cleaning companies, janitorial services, pest control firms, and other businesses dedicated to keeping up American households.
Choosing Franchising Companies to Invest In
Prospective investors do not have to limit themselves to holding stock in the big casual dining franchises of Wall Street. Day traders may enjoy the volume of companies such as McDonald’s, Domino’s and Yum Brands, but other equity opportunities may also prove to be attractive.
When evaluating the stock offerings of franchising companies, it is important to remember that some of these firms are very dynamic. The value investing method of buy and hold may not always apply. One example in this regard is the Dwyer Group, which has a corporate history dating back to the early 1980s. this company started as a small carpet cleaning outfit before branching out into kitchen cabinet refinishing companies; by 2010, the Dwyer Group was deeply into the franchising model, and it even acquired an international presence through a Canadian landscaping firm. In 2014, the Dwyer Group was acquired by an equity group; this acquisition resulted in a windfall for savvy investors who had been following the company.
Franchise Company Evaluation for Investors
When evaluating potential franchise companies for investment, here are the main aspects to look for:
- Demand for the particular goods or services being offered
- Profit potential
- Satisfaction among existing franchisees
The points above should be added to the regular due diligence evaluation that all equity investors should perform on prospective companies.
Other franchise models that are interesting to investors include: in-home care for the elderly, business-to-business (B2B) companies, personal services such as spas, and delivery services that follow the mobile app economy.
Reading financial statements from franchising companies is different from other business models. Potential investors should look for the number of locations and the geographic distribution as well as the average annual sales at each franchise. It is tempting to focus solely on the top performer; this should be avoided. Pioneering franchise models often carry a substantial amount of risk to investors; however, the experience of the management team is more important.
Investors who do not favor long-term positions should look at the casual dining franchises that seem to be having a hard time. Some of the worst performers in 2015, for example, have posted considerable returns; for example, shares of El Pollo Loco and Famous Dave’s were less than stellar. Investors looking to cash in on the potential rebound of these franchise models, which are often besieged by competition, should pay close attention to changes in management as well as corporate raiders circling; the stock of these unfortunate performers could turn around rather quickly.