It Would Be Good If Things Got Worse

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

McDonald's (NYSE: MCD) has had a rough spell. For example, Bloomberg reports that its first-quarter same-store sales declined for the first time in about a decade. However, for conservative investors, McDonald's remains one of the best ways to get access to emerging markets.

An American icon

McDonald's and its golden arches are nothing short of an American icon. The company practically created the fast food industry as we know it today. That said, the U.S. market is mature and filled with well-heeled competitors. The United States, then, is more about market share than anything else.

Market share is an expensive game to play. It requires more than just having lots of restaurants. It means making sure your restaurants stay modern, that the menu is fresh, and that you take on new competitive threats with vigor. Although McDonald's is an excellent competitor on all fronts, it simply can't win every battle.

The over 60% price advance in the last five years, however, shows that's its doing pretty well in the much longer war over customers. That advance includes the recent slide of around 5%.

It's a bigger story Mac

Recent weakness, however, hasn't been all about the U.S. market. For example, sales were also soft in Europe. That's another mature region, so competition is fierce. However, Europe is also struggling through a painfully difficult economic period.

Unemployment in Spain, for example, is over 25%, with several other countries posting unemployment rates in the 10% area. McDonald's sells relatively inexpensive food, but if you don't have a job, even a Big Mac could be too expensive.

Asia, meanwhile, has been a drag because of a financially struggling Japan, and more importantly, the food scares in China. Yum! Brands' (NYSE: YUM) KFC same-store sales in China have been hammered (down in the double digits) by chicken quality concerns and, now, an avian flu scare. McDonald's sales have gone along for the ride, but not nearly to the same degree.

Diversified

Yum!'s China issues, however, show why McDonald's is such a great company for conservative investors. Both companies are investing heavily in international growth, particularly in emerging markets. And both see China as an important market in the future. However, Yum! earns about 40% of its bottom line from that one country.

So, if China sales are off, Yum! has big problems. McDonald's, meanwhile, has a much more diversified footprint. So, yes, China is a problem, but it isn't going to impact the bottom line in the same way. That said, if China's restaurant market grows the way many expect, Yum! is clearly going to see more upside. Regardless, conservative investors will be able to sleep better owning McDonald's.

Not the only struggler

McDonald's shareholders can take comfort in the fact that it isn't the only industry leader struggling of late. For example, Darden Restaurants (NYSE: DRI) has also been having a hard time with its concepts.

Darden owns Olive Garden and Red Lobster, among others. These two core brands are mature and compete against tough players in the casual dining space. While the company has a number of smaller concepts it is working to expand, its two big brands still have an outsize impact on its performance.

With a slow economic recovery from the deep 2007 to 2009 recession, differentiating these older brands has been difficult. However, Darden didn't become the largest casual dining restaurant, with industry leading profit margins, for no reason. Similarly, McDonald's didn't get to be the largest fast-food restaurant chain by revenue by mistake.

Buying opportunities?

Despite its many strengths, Darden shares are trading at depressed levels and yield north of 4%. That is a buying opportunity. McDonald's, on the other hand, despite a 3% dividend yield, is still a little pricey unless you are an ultra conservative investor. Most investors should keep an eye on the shares for a deeper sell off, which would make them a really good buy. I recommend taking a closer look if the yield tops 4%.

Yum! Brands, meanwhile, is more of a growth option for investors who want exposure to the China story. Even after the China food scares, however, the stock still isn't what I would consider cheap.

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.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of Darden Restaurants and 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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