Is There Extra in this Value Meal?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If someone is going to give a recommendation for a long term core holding, one of the names that invariably comes up is McDonald's (NYSE: MCD). It's not surprising why, the company is ubiquitous with fast food, but has continued to evolve their menu and their sales. When I was growing up, McDonald's meant a burger, fries, and a soda. Today I know many people who go to McDonald's for their oatmeal and McCafe drinks who don't even eat burgers. Since the stock has doubled in the last five years, some might think this stock is getting a little too expensive. McDonald's has been defying the critics for years. The question is, will McDonald's shareholders continue to say I'm loving it, or will the shares head to the dollar menu?
Has McDonald's Hit the Saturation Point?
The first question when looking at McDonald's has to be saturation. Is the company done growing by adding new restaurants? As of the end of 2011, the company had 27,075 franchised restaurants and 6,435 company owned restaurants, so saturation could be a concern. McDonald's uses data compiled by Euromonitor International, specifically the number of “Informal Eating Out (IEO)” restaurants. As of the company's last annual report, McDonald's accounted for about 0.5% of the worldwide IEO restaurant locations, but accounted for 8% of the total sales. With only 0.5% of worldwide IEO restaurants it seems that McDonald's can continue to grow for a long time without hitting worldwide saturation. Further proof that McDonald's hasn't hit its saturation point is the company's new restaurant growth has actually picked up in the last few years. Look at the percentage of new restaurant growth in the last five years:
McDonald's is expecting to open 900 net restaurants in 2012, which equates to growth of 2.68%. This is a higher growth rate than 2011, which shows the continued acceleration in growth.
Same Store Growth
In 2011, McDonald's grew comparable sales in all three of their operating regions with overall growth at 5.9%. Same store sales grew by 4.8% in the U.S., 5.9% in Europe, and 4.7% in Asia-Pacific. Showing that McDonald's is continuing these gains, January 2012 same store sales grew by 6.7%, and February grew by 7.5%. Over the last year plus a few months, average same store sales are up just over 6%. With new stores adding somewhere between 2-3% growth, this would seem to indicate somewhere between 8% and 9% overall revenue growth. However, there are several growth drivers that may increase even this impressive top line number.
International Growth
Since the majority of McDonald's stores are located in the U.S., overall sales growth follows U.S. store growth. As of the end of 2011 about 42% of McDonald's total stores were U.S. based. However, of the 900 net new restaurants expected in 2012, about 750 will be in the Asia-Pacific region. Since Asia-Pacific showed the fastest revenue growth in 2011 (19%), this will further grow the percentage of sales from this faster growing region. In fact, over time as McDonald's opens more restaurants in Europe and Asia-Pacific, the company's growth rate could actually increase. In particular, if new store growth in Asia-Pacific continues at the current pace, Asia-Pacific could equal McDonald's U.S. market presence within the next 3-7 years.
U.S.A. Growth
There are several other factors that seem to be potentially big growth drivers in the future. First, McDonald's has been remodeling stores in the U.S. to add drive-thru capabilities, and longer store hours. It will be years before the majority of U.S. locations have 24 hour locations. McDonald's is also in the process of re-imaging many of its restaurants. With 2,500 re-imaged restaurants in 2011 and another 2,400 planned for 2012, these updated stores should improve sales as well.
European Growth
In Europe there are over 1,500 McCafe locations, these locations would be direct competitors to stores like Starbucks (NASDAQ: SBUX) and Dunkin' Brands (NASDAQ: DNKN). These McCafe stores are separate portions of McDonald's that offer McCafe beverages, desserts and snacks. If McDonald's brought this concept to the U.S. it would add a new dimension to McDonald's sales. With the continued expansion of the McCafe line of beverages, McDonald's is going after the coffee and beverages market. With over 2 billion cups of coffee consumed in the world every day, there is huge potential here.
Asia-Pacific Growth
In the Asia-Pacific region, McDonald's has established kiosks that offer desserts. These kiosks could be brought to other parts of the world if they continue to be successful. In addition, McDonald's only offers breakfast foods at 75% of their current locations. This means over 2,200 stores can add the breakfast menu and add another dimension to their sales. In the Asia-Pacific region, delivery is offered in over 1,500 restaurants. This is another potential growth driver for McDonald's worldwide. Imagine being able to order from McDonald's and having it delivered! Many customers worldwide would appreciate this convenience and could change the complexion of McDonald's sales the way the drive-thru did years ago.
Conclusion
Long story short, McDonald's still has a lot of room to grow. The company is not resting on its laurels and you can see has many avenues to continue growing. The company has repurchased 2-3% of outstanding shares in the last two years. The stock sells for about 17 times 2012 earnings and is expected to grow at 10%. Based on the above factors, i think the company could grow faster than this. Their main competition worldwide is Yum! Brands (NYSE: YUM) which supports over 37,000 restaurants. With McDonald's operating about 33,500 restaurants, just to match the restaurant count of Yum! Brands, McDonald's could increase their total store count by 10%. Since Yum! Brands sells for over 21 times earnings, versus 17 times for McDonald's, it seems that McDonald's could be undervalued based on this competitor. Though the stock has doubled in the last five years, there is still quite a bit of growth in front of the Golden Arches.
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