3 Big Reasons to Buy McDonald’s Here

By Douglas Ehrman - September 7, 2012 | Tickers: CMG, MCD, SBUX, YUM | 0 Comments

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The Golden Arches have long stood as a symbol of America, for better or worse, both domestically and abroad. As the company continues its attempts to spread its influence, there are three significant reasons why McDonald’s (NYSE: MCD) looks attractive at current levels: its agility is evolving with new trends, it lacks any real competition and it's executing new strategies that position the company for growth. These factors combine to make McDonald’s P/E of 17 and dividend yield of 3.1% the right call for your core portfolio.

Shifting Trends

While most fast food chains have made significant efforts to improve the health profile of their menus, few have gone about the transition as intelligently as McDonald’s. Largely in response to a national outcry over falling health standards, particularly amongst children, the company has made a real effort in this department. As demonstrated by the success of former subsidiary Chipotle Mexican Grill (NYSE: CMG), Americans are turning to healthier options, including those of the vegetarian variety. Chipotle’s success in the fast-casual dining space has sent a clear message that McDonald’s has heard.

While arguing that McDonald’s has become the go-to healthy eating choice lacks credibility, the company’s marketing team should be commended. By focusing on making Happy Meals healthier, the company gets to claim that it not only cares about health, but about kids. Nobody ever went broke trying to protect our children.

The other major trend that McDonald’s has ridden to very real success is the introduction of its McCafe. This division has been successful in not only competing with premium coffee purveyors like Starbuck’s (NASDAQ: SBUX), but also with smoothie shops. The smoothie part of the business serves both the health trend and the premium coffee house trend; the combination has driven revenue growth over recent quarters. Starbuck’s expanded into smoothie options even before McDonald’s and has had success in the sector. While not always the case, even the appearance of health-conscious options is positive for a company’s bottom line.

Competitors, or the Lack Thereof

Another major factor helping to make McDonald’s the strongest player in its space is the lack of real competition. By market capitalization, the next closest competitor is Yum! Brands (NYSE: YUM)which operates KFC and Taco Bell; Yum! is only a third of the size of McDonald’s with market caps of $91.5 and $29.9 billion respectively. Yum! focuses on different product segments, and, based on recent customer satisfaction studies, continues to slip in both consistency and value ratings. Other burger-focused options are dwarfed by McDonald’s and are struggling to keep pace.

An additional result of the move by consumers to healthy choices is that the only day-to-day competition for McDonald’s has become Subway. Chipotle definitely cuts into the health-focused business, but with an average ticket several dollars higher, Chipotle is rightly classified in a different market. Until a legitimate competitor enters the market, McDonald’s is the best choice.

Going Local

Another factor allowing McDonald’s to excel is its ability to customize its product offerings for specific geographic locations, particularly outside of the U.S.  In a development that demonstrates true adaptability, the company that built an empire on the cheeseburger is set to open its first vegetarian-only restaurant in India near the Golden Temple. Indian’s concentration of Hindus and Muslims means that neither beef nor pork will do well; a population that is roughly one-third vegetarian means that if McDonald’s wants to succeed, it needs to adapt.

The company currently has 271 stores in India, with the most popular item being the McAloo Tikki burger – it substitutes a spicy potato patty for the meat. The Maharaja Mac, which features chicken instead of beef, is also a popular menu option. India has the potential to be a major growth area for the company, making its ability to become a relevant dining choice for the local population as important as it is impressive.

The Trade

At current levels, McDonald’s is well positioned for growth and income. The company has a twenty-five year history of increasing its dividend, and with U.S. Treasuries remaining sub-2%, the yield should be a welcome addition to your portfolio. The three factors above demonstrate why McDonald’s should continue to perform over the medium and long-terms. The company should be added to most core portfolios.

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