Is There Too Much Junk in this Lazy Stock?

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

Investors are pinning their hopes on McDonalds' (NYSE: MCD) latest salivatory offering, the McRib, to boost sales and to help end the year on a good note. There has been talk about how MCD needs saving, but does this nearly $100 billion dollar enterprise really need help to grab investor’s attention? I don't think so.

McDonald's is not the kind of stock that will give you a quick short term return and boost your investment. If you are the kind of investor that expects such output from investments, McDonald's is definitely not for you. Instead, what you can expect from McDonald's is a stable but slow growth of at least a 3-4% dividend yield, plus the stock appreciation of about 4%. 

Now, before you complain about the returns let me tell you that Mcdonald's is one of those stocks that exceeded investor expectations in a very tough year. The company was able to show a year over year growth of about 3% in November 2012 compared to the zero growth that was actually expected. The main concern with McDonald's came when they announced that their October worldwide same store sales declined to the tune of nearly 2%, but barring that isolated incident McDonld's same store results have been good and steady ever since 2006, including during the recession.

Part of the reason why McDonald's is so resilient is their franchise business model, pricing, and their strategy for entering new markets. They understand the need to build an image in a unexplored territory, and they do that by opening company owned stores first and then letting the franchisee take over. Enough importance is given to stabilize the sourcing and the logistics so that further expansion through franchised outlets is a breeze. 

Their average price point of $5 per customer adds very well to their resilience factor, as that's very affordable in trying times, specially when you compare it to what one would have to spend on a dinner at any average restaurant. It is what one may call recession-proof pricing, which is why their stores can produce $2.7 million in sales on average every year.

A Look Around:

YUM! Brands (NYSE: YUM), the umbrella company for KFC, Pizza Hut, and Taco Bell, might be hitting a bit of a rough patch due to the slower growth in China, which accounted for around 54% of their revenue in Q3 2012. Growth will be lower in Q4 and profits will take a bit of a hit as well. Looking at the larger picture, YUM! has increased earnings per share by 25% compared to the current quarter last year. I expect earnings of at least $3.10-$3.30 a share. This trend is likely to continue as YUM! keeps expanding in the emerging economies, and they've been performing well in the recent quarter, earning about $470 million--a 23% rise over their earnings in the same quarter last year.

While comparing McDonald's to YUM! as investing options, I noticed that even though YUM! enjoys a higher gross margin, their operational expenses are lot higher that McDonald's, which takes a toll on the net income. This is evident in their 5 year average growth rate of nearly 10%, compared to McDonalds' 23%.

Another thing which one must keep in mind before investing in YUM! is that they have a higher Debt to Equity ratio, which might allow them to seem attractive in the short run' but on the flipside, it makes them very volatile on a long term basis.

Mondelez International (NASDAQ: MDLZ) is another interesting stock. With annual sales worth $36 billion from brands like Cadbury and Oreo, Mondelez is one of the largest food brands in the world. Mondelez’s separation from Kraft Foods is expected to be helpful in reducing their overhead costs, and in turn increase operating margin, which is below the industry average.

What Mondelez needs to do to further improve its revenues is expand in emerging markets like India and China. There is a strong potential in this stock if they get these things right. There is a great growth opportunity in this stock, and their decent dividend yield of 2% is something that attracts some good interest towards the company. 

A Foolish Bottom Line

Coming back to where we started from, the bottom line remains that McDonald's is a solid stock for a patient investor. It is robust, strong, and steady. At an assured 7%-8% a year it is a slow-paced minting stock. McDonalds' business model will see them sail through tough times, and these are tough times indeed.

 


Shaunak88 has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend 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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