Dow Dog McDonald's Poised for Outperformance

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

Here's a personal twist on the Dogs of the Dow theory that may lead you to a potentially dependable Blue Chip thats temporarily on sale:

I screen for the absolute worst annual Dow performer-- ex-tech stocks and cyclicals.  Technology Obsolescence can be permanent...and cycles that drive cyclical stocks can last years--not months.

So who wears the 2012 "Non Tech, Non Cyclical Dow Dog" Crown? Its a Blue Chip with a consistent, predictable financial performance: McDonald's.  Mickey Dees dropped 12 percent in a strong Up 2012 Market.

Meet the Previous Dow Dogs

Before we whet our appetite for fast food...what if we bought 2011's Non Tech Non Cyclical Dow Dog? That would have landed Bank of America which dropped 58%...and then rebounded 105% in 2012.  It would have taken guts to buy the truly hated big bank in the aftermath of the financial crisis. It would have paid off.

2010's worst overall performer?  Alcoa..a cyclical...plummeted 48%.  But AA proceeded to drop another 44% in 2011.  Aluminum cycles can last for years.

The lesson I take from this exercise? Force yourself to buy consistent, blue chip earnings growers.  And when you stumble across companies that drift out of favor due to any temporary factor--you may find opportunity.

So when NYC Mayor Bloomberg went on the attack against large soft drinks, my ears perked up. And when I saw ole reliable McDonald's stock perform like a soggy McNugget..I got to wondering:

As Warren Buffett has noted in this Football metaphor: are Investors focused on the Score Board (the stock quote) and not watching what's happening on the Field?

McDonald's (NYSE: MCD) stock price simply does not behave as consistently as its underlying business--and that could mean opportunity.

Here's what McDonald's earnings have done the past 5 years. Steady growth each year through good and bad times:

McDonald's Earnings (Per Share):

2012:  $5.31 (EST)

2011   $5.27

2010   $4.58

2009   $4.11

2008   $3.76

McDonald's always has challenges: the Dollar Menu isn't competitive..the Dollar Menu is TOO competitive and cannibalizing the regular menu...MCD doesn't offer enough healthy food...MCD has too many new healthy options and ignoring what customers really want.

Its called noise.  How do you conclude otherwise if you look at earnings or dividend payouts:

**McDonald's Has Increased Dividends 25 Consecutive Years

**McDonald's Present Dividend Payout is 3.5%

**McDonald's Raised Its Dividend 10% This Year

69 Million people eat at Mickey Dees every day.   Anecdotally, it seems there's a McDonalds everywhere I travel in the United States.   And, yet, 2-3rds of MCD sales are NON -US! If fast food was a football game, the game would have been canceled due to lack of competition.

McDonald's Has a Huge Competitive Moat

I suggest MCD has a Consistency and Brand Reputation moat.  You say thats hardly an impenetrable moat? Consider this:

McDonalds spends well over $1 billion/Year training its staff  (thats close to Burger King's total SALES) and graduates a quarter of a million employees from its company training facility.   MCD invests heavily in technology and training--assuring a seamless, consistent customer experience in more than 100 countries and numerous cultures.

You know what you're going to get at MCD--no matter where you visit. They duplicate their food preparation process with the same equipment.  I know I'll get in Montana what I like to eat in Massachusetts.

There's always a lot to worry about with competition...

Burger King (NYSE: BKW). Burger King was a serious MCD competitor-- thats now on the comeback trail.  Burger King has gone in and out of private equity ownership and has emerged as a leaner, better competitor with smaller stores and an emphasis on drive through menus and convenience.  BKW is growing it earnings 16%. But its burdened by large debt--twice the Industry average. Its tweaking its menu hoping to hit a hot product. It hopes to gain traction with chicken nuggets which apparently are hugely popular with the Drive Through  customers.  But BKW is a niche $6 billion player. It long ago gave up the battle to take on MCD head to head.

Wendys (NASDAQ: WEN) Wendy's is another former head to head MCD competitor now relegated to seeking a niche in the fast food landscape. WEN sold its Arby's chain last year to concentrate on an "early and late" strategy--enhancing its early morning breakfast menu with affordable, healthy choices and aggressively pursuing a late night drive through strategy.  Wendy's has aging restaurants and plans to refurbish its stores in the next few years.  Wendy's is modestly profitable but its Earnings are flat for several years. Its a survivor.

Panera Bread (NASDAQ: PNRA)   The real threat to McDonald's may be more upscale restaurants moving down in price to challenge the Fast Food thesis. Panera Bread is a leader.  PNRA offers a comfortable  restaurant experience with a healthy menu priced just slightly higher than MCD's regular menu.  PNRA has also benefitted from higher-end consumers who've "moved down"  to its affordable menu.  PNRA is a serious option for fast food customers seeking a quality dine in experience.  Thats how its grown its earnings an average 27% per year the past 5 years.

But McDonald's size absolutely dwarfs all of its competitors: MCD  is one of the most recognizable brand names in the world..and that is  a powerful moat.

Don't believe me?  Ask the people who OPPOSE McDonald's.

The Packard Children's Hospital Center for Healthy Weight surveyed kids ages 3 to 5. They served identical food in 2 separate choices: one option with McDonald's packaging...the other without MCD packaging. Every kid said the McDonald's packaging Food taste best.  And if you have a young child, you know the power of the Happy Meal Toy.

Bottom line: McDonald's always faces new competitors with the theme du jour or hot new food option or great marketing campaign. McDonald's continues to come under fire for fat content, calories, nutrition worries, even its soft drinks. Yet MCD keeps winning. As it has for more than a generation. Shareholders keep saying: I'm Lovin' it.



Grahdodd has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's Corp, and Panera Bread. The Motley Fool owns shares of McDonald's Corp and Panera Bread. 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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