I'll Have The McValue Meal!

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

For most people on earth, McDonald’s (NYSE: MCD) is a symbol of capitalism and a poster-brand (I think I just invented a word) for obese kids. Yet, despite a whole bunch of essentially pointless accusations, the company delivers real value to its investors. In this piece, I’ll examine why McDonald’s is a must-have stock on your portfolio and take a look at a couple of competitors to re-affirm that view.

The Basics

McDonald’s is a highly recognized brand world over. Kids and adults everywhere identify the Golden Arches very easily. In the USA, a McDonald’s meal is cheap. Even in most developing countries, hitting a McDonald’s is far cheaper than eating out at most other places. McDonald’s also tends to add a local touch to their menus when they expand to different territories – a good example of this being the McSpicy Chicken burger that they offer in India to suit the palate of the Indian consumer.

The company also has introduced new products such as a breakfast menu and has its pulse on consumer trends. The company has recently introduced Chicken Wings to its menu, not to mention the McCafe line that it recently added. The pilot for the Chicken Wings is alleged to have gone well, prompting Sterne Agee to re-iterate its BUY rating on the stock. Innovation is essential for a company to dominate a market, regardless of the industry. In addition to this, the sheer volume of the company’s operations adds to its attractive nature. According to the company’s website, there are over 34,000 restaurants globally across 119 countries and they employ nearly 1.8 million people.

The Competition

The company dwarfs the rest of the competitors in this space. McDonald’s has a market capitalization of $90 billion while Yum! Brands (NYSE: YUM) and Burger King Worldwide (NYSE: BKW) have capitalization of $29.54 billion and $6.23 billion respectively. That’s a huge difference in capitalization, especially when you consider the fact that Yum operates far more brands than McDonald’s.

Yum! Brands was recently in the news for all the wrong reasons. The company gets nearly 40% of its revenues from China where KFC is considered the most popular fast food chain. Fourth quarter same store sales fell for the company thanks to negative publicity generated by a Government probe into one of their local suppliers. The Shanghai Food and Drug Administration on Dec. 20 said tests conducted by a third-party agency from 2010 to 2011 found found eight batches of chicken supplied to Yum by Liuhe Group had antibiotics levels that didn’t meet prescribed standards. While the fall-out from this is logically only expected to be short-medium term, the company will now have to mount a PR campaign to offset public anger in China, which is essentially an unwanted expense. When you compare the basics of McDonald’s and YUM, you’ll see that McDonald’s comes out as the winner. The trailing P/E ratio for McDonalds is around 17 whereas that of Yum is 19. McDonald’s operating margin of .30 is also better than that of YUM which is near .16. In terms of Gross Margins too, Ronald McDonald triumphs over the Colonel Sanders brand.

Burger King Worldwide doesn’t stand much of a chance when competing against McDonald’s either. McDonald’s could buy Burger King out many times over and still be left with cash to spare. EBITDA (ttm) for McDonalds is $9.78 billion while that of Burger King is $624 million. Clearly in some cases, size does matter. Burger King however, has some great expansion plans. The company is moving aggressively in Latin America and has tied up with Beboca, which is a long standing franchisee of the company, to form a new venture called BK Centro America. The venture will own rights in 178 restaurants in Central America. Burger King will need to expand its businesses to fast growth centers such as India, where they currently operate no restaurants, if they want to really make a difference to their bottom-line numbers.

The Risks

Ah yes, the boring part. Obviously no investment or company is without risks and McDonald’s has its fair share too. Input costs are rising thanks to increase in the cost of food products, particularly corn. With a rise in input prices, the company will be hard pressed to maintain its profitability and will have to rely on effective cost management to avoid passing on these increase in costs to the consumers. However, a fact that negates this is the dividend that McDonald’s pays. The company has been paying dividends for a long time, certainly since before I was born! This is a sweetener in the entire deal.

The Bottom-line

Don’t think twice. The company has performed well during recession times and has been steadily growing in value as well. Unless consumer attitudes change significantly, McDonald’s is a stock that you buy and keep for a long long time!

keshavr has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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