Is This Stock a "Happy Deal"?

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

Fast food giant McDonald’s (NYSE: MCD) recently released its second quarter results and they were not as good you’d have expected. The economic weakness has affected many food service retailers around the world and McDonald’s is no exception to it. Even though the company’s resilient business structure has helped it to post a profit, it still trailed the analysts’ estimates.

McDonald’s is primarily a franchiser, with more than 80% of its global restaurants operated by local businessmen and the company heavily relies on these franchisees for generating profit yet, it was unable to fulfill the expectations.

Let’s take a look at the factors that held back McDonald’s growth.

The facts & figures

McDonald’s revenue increased 2.43% to $7.08 billion as compared to prior year, marginally below the analysts’ estimate of $7.09 billion. The net income increased 3.7% from $1.35 billion to $1.4 billion and EPS increased $1.32 to $1.38 per share. The foreign currency exchange rate affected the earnings by $0.02 per share, hereby preventing the company from satisfying the analyst’s estimate of $1.40 per share.

Given the fact that McDonald’s is heavily exposed to Europe, the company’s hope of generating larger revenue was dented by the widespread economic weakness in the continent. Global same stores sales increased 1%, but there was a decline of 0.1% in Europe because of the economy there.

The European segment performed better than the Asian market, where the comparable store sales went down by 0.3%. The negative impact of avian flu in China stalled the company’s growth.

Meanwhile, the comparable store sales went up 1% in the U.S.A. The sales in the United States were stimulated by the company’s increased emphasis on popularizing new and affordable products and including its gamut of products in the menu.

Even after struggling in the global market, McDonald’s was able to prevent its margins from going downhill. The global franchisees network contributed about 70% of the total profit and also compensated for the loss incurred due to reduced business opportunities in Europe.

What does the future hold?

McDonald’s has gone through its fair share of difficulties and is trying very hard to deal with the problems. The company will not be resorting to short term solutions like discount coupons and are focused on resonating with the needs of the people.

McDonald’s is trying to resurrect its market in China, which was predominantly affected by avian flu. The strategy implemented by the company includes diversifying its menu beyond chicken and marketing the campaign that concentrates on superiority and safety of its products.

In Europe, McDonald’s has been promoting cost effective products, but the alarmingly high rate of youth unemployment is proving difficult to cope up with. Complementing premium products with value products did result in a boost of sales in France, however, the problems in Germany still prevails.

Company plans to increase its global outlets, which resonate with its cardinal aim of achieving long term success. This strategy is supported by the fact that McDonald’s plans to set up around 1,200 to 1,300 new outlets. To achieve this target, company has allocated a budget of $3 billion in the current fiscal year.

Threats from its rivals

McDonald’s, though trying to fortify its place as the favorite fast food restaurant amongst the people, but a few companies seems to threaten the plan. Which are those companies? Let’s have a look.

Yum! Brands (NYSE: YUM)

The spread of avian flu left a deep scar on Yum! Brands, but the company is hell bent of its path of recovery. As the media coverage surrounding the news of avian flu is phasing out, the company is stern on its strategy of establishing around 700 KFC units in China, to compensate the aftermath of the catastrophic event. The company also plans on opening around 125 Pizza Hut restaurants in the U.S.A., while the development in the Indian market is also gathering a steady pace.

Burger King Worldwide (NYSE: BKW)

With an initiative of sustained periodic growth for a longer tenure, Burger King Worldwide has adopted a policy of increasing its franchisee network around the globe. The prime focus of the company is to build a prominent brand image and embark its dominance among its rivals. This will also help the company to reduce its overheads phenomenally.

Apart from these implementations, both Yum! Brands and Burger King Worldwide are intensifying their marketing campaign and are stressing on making economical food options available for their consumers.

Final words

Considering the above facts and figures, my perception for McDonald’s is a snail-like growth in the current fiscal year. Even in these tight economic and adverse conditions, it is one of the few companies that has posted a profit but, in my opinion, investing in the company before the European economy recovers won’t be considered a “Happy Deal.”

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Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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