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Burger King Gets Cooked

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Investors sell the fast food chain as an analyst downgrades the stock.

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Editor's note: Minyanville welcomes Josh Lipton as its newest staff writer. Lipton joins us from Forbes.com where he was a staff writer covering the markets and stock trends. Previously, he was assistant editor for the American Lawyer magazine. His work has been published in Rolling Stone, Spin, New York, and The Wall Street Journal.

Investors may love the Whopper, but they're selling shares of Burger King (BKC).

On Monday, as the market rallied, the stock of Burger King got burned. In afternoon trading, the stock fell 2.5 percent before closing the day down 1.5 percent. Investors appeared spooked after JPMorgan analyst John Ivankoe downgraded the company from "Overweight" to "Neutral" and slashed his fiscal 2010 earnings-per-share forecast from $1.36 to $1.25.

Burger King is the second-largest hamburger chain on the planet. In fact, the company claims that every day, 11 million men and women chow down at a Burger King restaurant somewhere in the world. But Ivankoe told clients that he sees sales weakness for the fast food chain continuing through the first half of the company's 2010 fiscal year.

The US represents 75 percent of operating income for Burger King but fast food sales have slowed since March, the analyst said, and he believes the grim employment picture here will remain a drag for the Miami-based burger flipper over the next six months.

On its face, the logic seems a bit counterintuitive. While it would seem that higher unemployment would lead to greater consumption of cheap burgers, the opposite is true in Ivankoe's analysis. Sales of fast food, especially for breakfast and lunch, are dependent on the convenience factor in consumers' eyes. When the job goes, apparently, so does the demand for a convenient quick bite.

As opposed to the deliciously greasy snacks at Burger King, Ivankoe says, on a forward 12-month basis, he prefers McDonald's (MCD) and Yum! Brands (YUM) given, he writes, "a combination of higher non-US exposure that has generally been performing better, more visible international unit growth driven by China, and lower operating leverage."

Over the past year, the stock of BKC is down 38 percent and it's down 25% in the in the past six months alone.

Over at Standard & Poor's, research analyst Mark Basham shares his colleague's lukewarm view of BKC. Basham put out a note on Monday morning maintaining a "Hold" opinion on the Whopper. He expects BKC to report June-quarter profits later this month of $0.35 per share versus $0.37 on the effects of the flu scare in Mexico and difficult comparisons due to a stronger greenback, he said.

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No positions in stocks mentioned.
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