This Restaurant Chain is a Long-Term Buy

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

McDonald’s (NYSE: MCD) has been considered a great stock for long-term income investors over several decades. However, it has just experienced the first slowdown after many years of growth. Along with that, insiders of McDonald’s have kept exercising stock options at much lower prices and selling their shares at the market prices. The total sell transaction is worth more than $22 million since October. Notably, Donald Thompson, the CEO and Director of the company, exercised 42,300 shares at $35-$39 per share and sold the same amount of shares at $87.56 per share. Should we be bearish on these recent insiders’ sells? Let’s find out.

Recently, McDonald’s announced its decrease in comparable sales in all corners of the world. The US and Europe’s operations experienced the same decrease of 2.2%, whereas emerging markets, including Asia Pacific, the Middle East, and Africa were down 2.4%. Total, the global comp sales reduced by 1.8%.

Similarly, one of its peers in the quick service restaurant industry, YUM! Brands (NYSE: YUM) expected that in the fourth quarter it would experience a contraction of 4% in same-store sales in China, which derived more than 44% of its total revenue. Lazard Capital Markets analyst have downgraded McDonald’s from “Buy” to “Neutral,” because the company was losing its market share in the US, and the fast-food consumption was weakening globally. Year to date, McDonald’s has lost nearly 12% of its market value, when it decreased from more than $100 to only $87 currently.

One of the main reasons contributing to McDonald's success in the last 10 years was the Dollar Menu. However, if McDonald’s just focused on value, it was hard to charge a much higher price for premium items. That was why it launched the Extra Value Meal, with the cost of less than $2 to narrow the gap. For several years, McDonald’s had shifted its focus to Extra Value Meals for a higher profit margin, but due to its current environment, the company said it was important to get more customers into the restaurants, so it would focus back on the Dollar Menu. I

nterestingly, when McDonald’s first launched its Dollar Menu in the late 2002, its stock price had experienced significant decline from $48 in 1999 to only around $13.5 in 2003. The net income in 2002 was only more than half of 2001's net income, due to the operating restructuring pretax charges of $853 million. At that time, comparable store sales in the US fell 1.3% in October and November. So historically, McDonald’s has experienced the similar slowdown.

Even with the recent slowdown, McDonald’s has still been a market leader in the quick service restaurant market for more than 5 years. It even increased its US market share from 46% to 49.6% from 2006 to 2011. The second largest player in the market, Wendy’s (NASDAQ: WEN), was much further away with only 12.3% market share in 2011.

 

Currently, McDonald’s is trading for $87.04 per share, with the total market capitalization of $87.39 billion. The market is valuing McDonald’s at only 14.6x forward P/E and 1.6x PEG. YUM! is more expensive, with 17.5x forward earnings, but only 1.4x PEG due to the historical high growth in the Chinese market. In terms of forward earnings, Wendy’s is the most expensive with 22.8x P/E but only 1.1x PEG. However, it is generating trailing twelve month losses. Among the three, McDonald’s is paying highest dividend yield (3.3%), whereas YUM! and Wendy’s are paying 1.8% and 2.2%, respectively.

My Foolish Take

With the leading position in the US quick service restaurant market, and the refocus on the Dollar Menu, McDonald’s is still the stock of choice for the long-term. In the short-term, I think it would still be struggling, and the stock price will continue to be sluggish. Personally, I would rather wait for some decline in the stock price before initiating positions in this stock. 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure