Super Size Me

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

 On Oct. 19, 2012, McDonald’s (NYSE: MCD) posted its worst quarterly sales growth in nine years and disappointed Wall Street with its quarterly earnings report. The company reported diluted earnings per share of $1.43, down two cents from the same quarter in 2011.

The American fast-food restaurant, which has presence in 119 countries worldwide, has not been immune to rising food prices and global economic weaknesses. Having said that, I’d like to think of the restaurant sector as a fairly stable one because the demand for food is not likely to ever decrease drastically. Sure, an adverse economic climate can put you off going to a fancy restaurant for an expensive meal, but McDonald’s and the other companies we’ll be looking into really aren’t those types of restaurants.

Recently, Zacks reaffirmed their neutral rating on the shares of McDonald’s and set a $92 target on the stock. In the report, Zacks’ analyst wrote, “McDonald’s is faced with the macroeconomic headwinds especially in Europe, decelerating growth in Asia, intense competition in the US as well as unfavorable currency translations.” However, some of the company’s value driven initiatives have paid off. Share repurchase activity and yearly hike in dividends remain other positives on the stock. Also, McDonald’s has historically enjoyed moderate growth prospects with its exposure to faster-growing international markets, a strong balance sheet and consistent earnings. 

For all the concerns that analysts have raised regarding McDonald’s, I believe most of these challenges to be short term. The global economy is bound to pick up and the company is making up for the intense competition by moving ahead in emerging markets. Take India, for example, where McDonald’s currently has 270 stores--more than the 160 KFC locations in the country. The company hopes to open 250 more stores in India by 2015: this translates to a large chunk of franchising revenue.

While competition in the US is intense, no doubt, McDonald’s has certain key offerings that puts it apart from competitors. For example, it has been serving breakfast since the '70s, and most other restaurants are only catching up now, including Taco Bell (owned by Yum! Brands (NYSE: YUM)). The Golden Arches are also planning on selling ground coffee in Canada, and maybe other locations, depending on demand. McDonald’s has also moved into offering healthier alternatives for calorie-conscious consumers – apple fries instead of French fries, and so on.

The fact that McDonald’s lost 12% of its value since January makes it an excellent value stock. A couple of its key competitors are Burger King (NYSE: BKW) and Yum! Brands. Taco Bell’s new offerings, including the Doritos Loco Taco and the premium “Cantina Line,” led to a 7% improvement in same store sales and helped YUM! gain 9% in revenue overall. Taco Bell also has an opportunity to grow thanks to its increasing presence in China. In fact 86% of the company’s new restaurants are in emerging markets.

Burger King has been trading just above its offering price, and below its first day closing price after its June IPO. The company has seen many public offerings followed by private equity buyouts. However, Burger King doesn’t seem to be too attractive a prospect, as the debt-to-equity ratio isn’t great for the company. The P/E ratio too, seems to be hovering around 40, as opposed to nearly 16 for McDonald’s and 20 for Yum! Brands. Burger King is also pretty slow on picking up on trends – for example, it hasn’t entered the “healthier food” market as yet. The company has just caught on to the smoothies craze, which McDonald’s attacked long ago.

Out of this, I believe McDonald’s can deliver value. Part of the reason why the company didn’t grow was thanks to a global economic weakness, which I believe will eventually subside. The recent recession showed that McDonald’s can still do well when people cut on their food budgets. Another key factor is that McDonald’s has increased its dividend annually since 1976. McDonald’s dividend is currently $0.77 quarterly, or a 3.5% annual yield. I also believe McDonald’s will be able to weather the competition, and it is definitely a stock that investors should look at picking up.

ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide, McDonald's, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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