Why This Restaurant Is a Great Long-Term Investment

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McDonald’s (NYSE: MCD) has been in business for 72 years. The company has 33,500 restaurants worldwide and operates in 119 countries. In “BrandZ Top 100 Most Valuable Global Brands 2012,” McDonald’s is ranked number four overall with an estimated brand value of $108 billion. The company is ranked above some very well-known companies like Microsoft, Coca-Cola, and General Electric. McDonald’s is a very strong company.

In Q3 2012, McDonald’s revenue and diluted earnings per share were flat and slightly down year over year, respectively. While diluted EPS was slightly down year over year, McDonald’s actually posted a solid quarter. In the quarter, global comparable store sales increased by 1.9%. Revenue remained flat and diluted EPS were down due to foreign currency conversion. For example, in Europe, comparable store sales increased 1.8%. However, operating income in Europe decreased 7% in the quarter. Under constant currency, operating income in Europe increased 3%. Currently, Europe is in the middle of some serious economic problems, which has caused the value of the Euro to decline.

Similarly, McDonald’s comparable store sales in Asia Pacific, Middle East, and Africa (APMEA) increased 1.4%. While operating income in the region increased 3%, operating income increased 4% under constant currency. CEO Don Thompson stated, “We expect near-term top- and bottom-line growth to remain pressured as we focus on driving guest traffic and market share by leveraging our strategies and competitive advantages in response to the global economic, operating and competitive challenges. As we begin fourth quarter, October's global comparable sales are currently trending negative."

McDonald’s both benefits and suffers in a slow economy. In a slow economy, consumers are more price conscious. As a result, more people turn to McDonald’s. However, a slow global economy also puts pressure on McDonald’s menu prices. In other words, McDonald’s has a harder time raising prices to offset the rise in costs due to inflation. While spending declines in a global economic slowdown, there is still inflation because money supply is increasing.

Currently, McDonald’s is trading at a PE ratio of 16.6. Additionally, the stock has a dividend yield of 3.52%. McDonald’s recently raised its quarterly dividend to $0.77 per share or $3.08 per share annually. Using trailing twelve months numbers, McDonald’s has a payout ratio of 58%. Thus, the dividend is sustainable. Also, it is good to see that McDonald’s is returning a big chunk of its income to shareholders. McDonald’s is a very large corporation and, as a result, would be hard pressed to find significant high growth projects. Mature companies often turn to acquisitions because it is one of the few ways management can keep earnings growth at a high rate. However, acquisitions also often lead to integration issues.

Due to its large size, McDonald’s competes with a large number of companies. In coffee, McDonald’s competes with Starbucks (NASDAQ: SBUX) and in fast food restaurants McDonald’s competes with Wendy’s (NASDAQ: WEN), Burger King (NYSE: BKW), and Yum! Brands (NYSE: YUM). Starbucks has 18,066 stores in 61 countries, Wendy’s has around 6,527 locations in 28 countries, Burger King has 12,300 locations in 76 countries, and Yum! has a combined nearly 38,000 restaurants in over 120 countries and territories. Except for Yum! none of McDonald’s’ competitors match McDonald’s scale. McDonald’s has more than 33,500 local restaurants in 119 countries. In addition, Yum!’s large global presence is a combination of multiple brands like KFC, Pizza Hut, and other restaurants. Overall, McDonald’s entrenched brand, large global presence, and evolving healthier menu make the company difficult to challenge. That is not to say that McDonald’s competitors are not strong. Starbucks and Yum! are very strong companies. However, McDonald’s is on another level.

In summary, McDonald’s is a great investment. It has a one of the strongest brands in the world and is present in 119 countries. While the current global economic downturn is hurting McDonald’s’ overseas operations due to changes in currency value, the company has continued to perform solidly. When the global economy recovers, McDonald’s should resume its growth. In addition, McDonald’s competitors are not a big threat to the company. McDonald’s is great long-term investment and at a PE of 16.6 the company is not expensive.

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Alvin has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Burger King Worldwide, McDonald's, and Starbucks. 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.

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