This Fast Food Stock's Post-Earnings Drop is Much Ado About Nothing
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Fast food giant and Dow Jones Industrial Average component McDonald’s (NYSE: MCD) fell significantly when it reported disappointing quarterly results. As competition from smaller rivals heats up and global economies remain slow to recover from the worst recession in decades, should investors toss their shares aside? Or does the post-earnings drop represent a great opportunity to take a bite out of one of the best companies in the world?
Results that gave the market indigestion
In all, McDonald’s reported second-quarter net income of $1.4 billion, representing nearly 4% growth year over year. However, earnings per share clocked in at $1.38, missing analyst expectations by two cents.
Global same-store sales, a metric that includes only those locations open at least one year, rose 1%. At the same time, U.S. same-store sales also grew 1% in the quarter. Weakness was seen in the company’s European and APMEA (Asian-Pacific, Middle East, and Africa) segments, where same-store sales fell year over year.
McDonald’s cited sharp competition as a reason for weakness. Indeed, fast food peers Wendy’s (NASDAQ: WEN) and Burger King Worldwide (NYSE: BKW) have rolled out a slew of new products in an attempt to cut into McDonald’s industry dominance.
Wendy’s is firming up its U.S. operations, but the company is far behind McDonald’s when it comes to international expansion. Whereas McDonald’s is building thousands of new locations in faster-growing economies such as China and Russia, Wendy’s is still tethered to the slower-growing North American economies.
Wendy’s reported just one cent per share in earnings in the first quarter, and will need a catalyst in order to propel future growth. The company is slowly making entries into international expansion, but in the company’s most recent 10-K, management stated its intent as ‘aggressive, yet cautious.’
Meanwhile, Burger King has had its own fair share of struggles in recent quarters. The company’s full-year 2012 sales dropped 15% from the prior year.
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.
McDonald’s is still doing what it does best
It should be expected that any company with heavy exposure to the shaky European economy would see weakness there. And, it’s worth noting that McDonald’s is still growing.
It’s reasonable for the stock to sell-off somewhat, given the fact that McDonald’s shares were up nearly 14% since the start of 2013 and its quarterly results missed analyst expectations. But investors should keep an eye on what happens now. A pronounced sell-off that takes McDonald’s to a significantly lower valuation would represent a fantastic buying opportunity in a broader market devoid of screaming buying opportunities.
Prior to its earnings report, McDonald’s shares exchanged hands at about 18 times, roughly on par with the market's multiple of earnings. At the same time, McDonald’s represents one of the best companies within the S&P 500 Index in terms of earnings quality and shareholder rewards, which, in my estimation, means it’s a company that should trade at a premium to the broader market.
Speaking of shareholder rewards, McDonald’s is simply one of the most shareholder-friendly stocks in existence. McDonald’s has increased its dividend every year since its first dividend in 1976, and through a combination of dividend payments and share buybacks, returns billions to investors every year.
McDonald’s yields 3.2% at recent prices, much better than Wendy’s 2.3% yield and Burger King’s paltry payout. Even better, McDonald’s will assuredly raise its dividend for its fall payment, as it does each and every year.
Smaller rivals will have their moments in the sun. But in an industry in which customer loyalty is so important to survival, Foolish investors shouldn’t waste their time with fast food also-rans. McDonald’s and its golden arches represent the gold standard for long-term, buy-and-hold investments. Savvy investors should pounce on McDonald’s shares at current prices, and jump for joy should they fall below $90 per share.
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Robert Ciura owns shares of McDonald's. 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!