Stick With Mickey D's
Frank is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mickey D's, as McDonald's Corporation (NYSE: MCD) is affectionately called, has long been one of my favorite stocks. I first started writing favorably about the company (in another forum) more than a year ago. At that time McDonald's was trading at $74.21 per share, nearly 30% lower than Friday's closing price. There are many attributes about the company that I like, the most of which is its ability to attract customers across socioeconomic boundaries. Basically that means McDonald's performs well in virtually all economic backdrops. Granted, the company performs better when employment is good or improving, as it is today. Simply put, when more people can stop and pick up an egg mcmuffin on their way to work, the better it is for McDonald's.
McDonald's reported first quarter earnings on Friday. Earnings per share clocked in at $1.23, an 8% increase over the year ago period. According to the company's conference call, U.S. comparable store sales increased 8.9%. Europe's comparable store sales were up 5% and Asia/Pacific Middle East and Africa (APMEA) were up 5.5%. Overall, McDonald's global comparable store sales were up 7.3%. This is an amazing number given the size of McDonald's store footprint and the global economic challenges. It shows investors that the management team continues to execute flawlessly.
If you've visited a McDonald's recently (and who hasn't?), you've probably noticed that this isn't your McDonald's of the last decade. The company has refurbished stores across Europe and the United States at a dizzying pace. The menu items are vastly different than they were in the "burger joint" era. McDonald's, though still offering low-priced value meals with burgers and fries, has revamped its menu to include premium salads, sandwiches, and specialty coffee drinks. All of these provide higher margins than a typical happy meal. Several years ago McDonald's saw that it was losing ground in the breakfast space to Starbucks (NASDAQ: SBUX). McDonald's quickly upgraded its coffee and began offering specialty drinks, making it a direct competitor to the fast growing coffee shop. For a time Starbucks stumbled and McDonald's was able to gain share. As Starbucks has revamped and emerged a leaner, more competitive company, McDonald's has continued to thrive alongside it.
Despite its global presence, McDonald's has a tremendous amount of room for growth. The company has a far smaller presence in the lucrative Chinese market than rival Yum! Brands. Yum is the owner of KFC, Pizza Hut and Taco Bell. Globally, McDonald's plans to open 1,300 new restaurants in 2012.
McDonald's was the best performing stock in the Dow Jones Industrial Average last year. That performance hasn't carried over into 2012. Year to date, McDonald's is down 5.3% while the Dow is up nearly 5%. The recent lag in performance may spell opportunity for long-term investors to get into the stock. While some investors will "sell in May and go away", that might not be the best approach for investors in McDonald's. Over the last five years, McDonald's has risen an average of approximately 11% during each May through October time period. Over the last five years as a whole, McDonald's is up 99%.
Shares of McDonald's trade at just under 18 times earnings and just over 15 times 2013 projected earnings. McDonald's boasts a stellar return on equity of 38%. The company has increased earnings at an annualized rate of 18% over the last five years and revenue at an annualized rate of 5.3%. McDonald's has a solid dividend yield, at 2.92%. The company has increased its dividend at an annualized rate of 20.4% over the last five years.
While McDonald's management team has executed flawlessly, it must be noted that long-time CEO, James Skinner, has announced his retirement. During his eight year tenure as McDonald's CEO, Mr. Skinner served investors well. The performance of the company and the stock are a testament to his leadership. While it is normally a negative when a good leader leaves a company, it appears that he will be leaving the company in good hands. Donald Thompson, who will be taking over as CEO, has also been with the company for many years. Mr. Thompson is currently the President and COO and has already been an integral part of McDonald's success.
With the stock trading 6% off its 52 week high, long-term investors should consider McDonald's. If the stock continues to tread water in the near-term, investors are still getting paid a nearly 3% dividend yield. McDonald's still has a huge runway for growth. Revamped stores and fresh new menu items have recreated the brand and attracted even more loyal customers. Given McDonald's success in all economic conditions, investors may want to bite.
Motley Fool newsletter services recommend McDonald's, and Starbucks. The Motley Fool owns shares of Starbucks. fjconstantino 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.