Is Hedge Fund Favorite McDonald's A Good Investment?
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McDonald’s (NYSE: MCD) finished atop our list of the ten most popular restaurant stocks among hedge funds for the second quarter of 2012, taking the top spot from Yum! Brands (NYSE: YUM). 35 hedge funds and other major investors in our 13F database reported a position in the global fast food restaurant. As we mention in our article, the restaurant industry has been doing well in the U.S. despite the weak recovery and concerns about consumer spending. Restaurants such as McDonald’s have continued their growth plans in other countries as well.
One of the 13F filers reporting a position in the stock was billionaire Ken Fisher’s Fisher Asset Management. The fund owned 5.4 million shares at the end of June, up from only about 2,000 at the beginning of April. By essentially initiating a position last quarter, Fisher appears bullish on the stock (see more stock picks from billionaire Ken Fisher and Fisher Asset Management). Renaissance Technologies, which made its founder Jim Simons a billionaire, increased its stake by 10% during the second quarter to 5.2 million shares (find more stocks owned by Renaissance Technologies).
McDonald’s Corporation reported flat revenue in the second quarter of 2012 compared to the same period in 2011. Both company-operated and franchise restaurants saw little change in sales. Expenses crept up slightly, and so net income fell 4%. However, the company’s first quarter went fairly well and so for the first half of the year earnings were flat compared to the same period in the previous year. With a decrease in share count, earnings per share grew from $2.49 to $2.54. More recently, the company has reported that same-store sales rose 3.7% in August compared to a year ago. Europe and U.S. sales growth was about 3% while Asia (notably China) and Africa drove the strong results.
At a market capitalization of $92 billion, McDonald’s carries a trailing P/E ratio of 17. Considering its dividend yield of 3.1% and its strong brand, this is a fair price and, possibly, a bit low. In addition, as one might imagine from a budget fast food restaurant, it has little exposure to the broader economy: its beta is 0.3 (and, as we’ve noted, the restaurant industry in general has thrived over the past couple years despite weak U.S. growth). Sell-side analysts expect 2013’s earnings per share to be 10% higher than this year’s, which may be a bit high but investors should expect further share buybacks from the company as well as potential growth in net income. Using the Street’s assumptions the forward P/E is 15.
We would compare McDonald’s to fellow burger restaurants Burger King (NYSE: BKW) and Jack in the Box (NASDAQ: JACK) as well as to Wendy’s (NASDAQ: WEN) which serves burgers and chicken sandwiches. All three of these comparable companies trade at higher forward earnings multiples than McDonald’s does: Burger King at 21 times, Jack in the Box at 17 times, and Wendy’s at 24 times. These companies are considerably smaller (their market caps are $4.9 billion, $1.2 billion, and $1.7 billion respectively compared to McDonalds’s $92 billion), so they probably do have more latitude for growth, but their brands are also not as powerful. Furthermore, with the exception of Burger King, their businesses have not done particularly well recently. Given the smaller size of these companies, we would also treat large restaurant Yum Brands (NYSE: YUM) as a peer. The owner of Pizza Hut, Taco Bell, and KFC carries a trailing multiple of 21 and a forward multiple of 18, meaning that it too is higher priced than McDonald’s considering the companies’ earnings. Yum also pays a lower dividend yield. All of these companies except for Burger King also join McDonald’s on our list of the ten most popular restaurants among hedge funds. We don’t have any idea which restaurant’s food makes for the best value for the money, but in terms of the shares we think McDonald’s is the cheapest of these five options at this time.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide, Jack in the Box, McDonald's, and Yum! Brands. 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.