Is McDonald's a Buy?
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fast food giant McDonald’s (NYSE: MCD) almost needs no introduction. Those golden arches speak for themselves, and the company holds one of the most universally known and most valuable brands in the world.
After a disappointing stock price performance in 2012, McDonald’s is back to its winning ways, having gained 11% so far this year. Is there more upside potential for investors to savor?
Resilient performance in a difficult environment
McDonald’s same-store sales have seen some volatility in recent months, particularly in the U.S. where the payroll tax hike and frustratingly slow improvement in the labor market have served as body blows to the company’s key customer base.
Add to that the ongoing fiscal calamity in Europe, and you’d think McDonald’s was a stock worth shorting. Indeed, the company’s global same-store sales declined in January (by 1.9%), in February (by 1.5%), and again in April (by 0.6%).
However, the company got its financial house in order, reporting global comparable sales growth of 2.6% in May.
Close rival Burger King (NYSE: BKS) has had its own fair share of struggles in recent quarters. The company’s full-year 2012 sales dropped 15%.
The disappointing performance extended into the first quarter of the current fiscal year. Total revenue fell a massive 42% versus the same quarter the year prior.
On the plus side, the company has increased its dividend for two consecutive quarters. That being said, the stock yields just 1.1% at recent prices.
International expansion is a key tailwind
Investors needn’t concern themselves about McDonalds’ sagging same-store sales, because there’s still plenty of room for growth in the form of international expansion. McDonald’s has identified new avenues for growth all across the globe, particularly in the emerging markets, where expanding middle classes mean millions of potential new customers.
In that vein, I’d point investors to the company’s plans for China. McDonald’s has put huge efforts into developing its operations there. McDonald’s is currently executing on its plan to open 225 to 250 new restaurants every year until it reaches its stated goal of 2,000 restaurants in China by the end of this year.
Moreover, the company has now targeted growth through an additional member nation of the BRIC countries: Russia. McDonald's has 357 restaurants in more than 85 Russian cities, with plans to open at least 150 self-operated restaurants in Russia over the next three years.
This is one key advantage I believe McDonald’s has over smaller rival Wendy’s (NASDAQ: WEN), because Wendy’s does not yet have significant international operations outside of North America. At the end of 2012, Wendy’s had 374 franchised restaurants in 26 countries and territories outside of North America. That represents just 5% of the company’s total restaurant system.
In the company’s 10-K, Wendy’s management described its efforts toward international expansion as “aggressive, yet responsible.” Management points to several initiatives for international growth, including Singapore, the Middle East, North Africa, and Japan.
While these are encouraging developments, Wendy’s will have a very hard time penetrating the international markets if it does not act soon. The company has already given McDonald’s a head start, and once a company gets too far behind the industry leader, it will be extremely difficult to catch up.
Take a bite out of McDonald’s
Wendy’s and Burger King are both profitable companies that pay dividends to shareholders, but in the saturated fast food industry, go with the leader. McDonald’s has over 34,000 locations serving more than 69 million people each and every day. Moreover, McDonald’s has a market capitalization greater than its two peers combined, and has the financial prowess to beat back its competition in the company’s key target markets going forward. In short, what McDonald's wants, McDonald's will get.
McDonald’s is also a leader in the realm of shareholder rewards. The company returned $1.1 billion to shareholders in the first quarter alone, through a combination of dividend payments and share buybacks. McDonald's has increased its dividend every year since its first dividend payment in 1976.
In an investing environment where safe high-yielding stocks are hard to come by, McDonald’s pays 3.1%, better than Wendy’s and Burger King, and also greater than the 2% yield available on the broader market. In addition, McDonald’s will almost certainly increase its dividend again next month, as it does every year.
As a result, investors should feel very confident in making McDonald's a core portfolio holding, and should take any dip in the stock price as a welcome buying opportunity.
McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.
Robert Ciura owns shares of McDonald's. The Motley Fool recommends 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!