A Great Balance Between Price and Quality
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chipotle's (NYSE: CMG) 20% tumble sent shock waves among other fast food stocks. Investors were also disappointed to see McDonald's (NYSE: MCD) follow the trend as it missed earnings by 4.5% from a year earlier, bringing in $1.32 per share in net income. With beef prices sliding the third consecutive month, average price hovered around $4.932 per pound, which is higher by $0.12 from a year earlier. Having said that, McDonald's savings from its input costs were trumped by a higher dollar. This came in as a surprise for a company that reported a global sales growth of 5.6%, EPS growth of 11% and rewarded shareholders with a return of 34.7% in 2011. But what does really set this multinational apart from other fast foods names such as Jack In The Box (NASDAQ: JACK) or Wendy's (NASDAQ: WEN)? In my opinion - "A great balance between price and quality."
"Plan To Win" Strategy and Innovation
McDonald's continues to raise the bar in improving its image by free wi-fi, digital ordering, flat screen TVs and kids playgrounds that invite people to stick around and maybe spend more. It places a giant emphasis on its "Plan to Win" strategy in implementing the five P's to the core - People, Products, Place, Price, and Promotion. During the 1st quarter of 2012, its comparable sales rose 8.9% which were driven primarily by the ongoing menu innovations, popularity of Chicken McBites, and even favorable weather. Despite a challenging global economy in 2011, its dollar menu was able to grow its global comparable sales and guest counts by 7.3% and 4.8%, respectively, making it the best performing stock of Dow Jones 30.
The following graph shows McDonald's cumulative total shareholder return, which includes price appreciation and reinvestments of dividends in comparison to the S&P500 and the DJIA components for the five year period ending in Dec. 31, 2011. The graph assumes that the value of an investment in MCD, the S&P500, and DJIA was $100 in year 2006. For the DJIA companies returns are weighted for market cap. as of the beginning of each indicated period.
Fast Food Giant
McDonald's does business in more than 100 countries feeding 68 million people each day and employing 1.7 million individuals in its 33,510 restaurants worldwide. Its sheer size in terms of market capitalization and vitality to the U.S. economy resulted in its symbol inclusion as one of Dow Jones Industrial Average blue chips in 1985.
Its global sales totaled $85.9B in 2011, which was up from $76.7B in 2010 and $72.4B in 2009. Its domestic sales alone comprise $32B of the $162B quick service fast food industry, which also includes Burger King and Wendy's. The popularity of the golden arches have become almost emblematic of the term globalization to a new coined phrase "McDonaldization," and newspapers such as The Economist now use the "Big Mac Index" in comparing costs for a Big Mac in different countries. In case you're wondering, Norway had the most expensive Big Mac compared to India, which had the cheapest.
5 Year EPS Growth Leader
Having a 3% yield is great, but having a consistently growing dividend is even better. McDonalds pays $200 million more each year in dividends than the year before. From 2009 to 2011 it paid out $2.2B, $2.4B, and $2.6B respectively. Last year the company put $6 billion back into the shareholders pockets through share buybacks and dividends, as well as grown its operational income by 10%.
The balance sheet is financially sound as the management likes to keep low debt levels in short term borrowing. Compare last quarter's nearly $3.64B short term debt to 2011's 3rd quarter debt of $5.078B. Its trailing twelve month 38% ROE trumps the 14.7% of its peers. While investors pay more of a premium for Yum Brands (NYSE: YUM) in terms of multiple, MCD takes the lead in EPS growth. Yum Brands has a lower PEG ratio of 1.5 and a multiple of 17, compared to McDonald's 1.8 and 20.6. However, MCD's five year 18.13% EPS growth rate far outpaces YUM's 13.4%. The chart below further shows the surprise that came from last quarter's earnings miss as MCD remained to be a non-risky investment with in-line earning results throughout past quarters.
Not to say that things can't go wrong, on Wall Street there are always potential risks involved. One of the main pitfalls for multinationals remains to be the currency exchange rate risk. Large hedges as well as constant purchases in local goods and services are constantly overtaken in order to minimize the impact of foreign currency translation. For example, last year's revenues increased 12%, but were adjusted down to 8%; operating income rose 14%, but in constant currencies was 8%. With the weaker Euro, McDonald's saw a negative impact from its currency hedges in 2011 of nearly $15.5 million.
Despite holding a strong competitive position in the fast food market place, McDonald's intends to grow market share and continue to optimize its menus, modernize customer experience and broaden its accessibility. Its 2012 initiatives focuses on balancing core menu classics like Blueberry Banana Nut Oatmeal, McCafe beverages, and increasing its 24 hour locations. While I remain a long term bull on MCD, I believe it is currently fairly valued at $85 - $90 range.
edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend Chipotle Mexican Grill, Jack in the Box, 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.