McDonald’s and Commodity Prices: Poised for Another Run
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sure they scoffed, and why not? About four months ago when the USDA suggested that wheat and corn prices would remain flat or drop in 2012, few believed it. Fewer still saw it for what it was – an opportunity for value in the soon-to-be beaten down fast food and casual dining industry. Potential growth – or lack thereof - in international markets played a big role then, just as it does now of course. But a quick scan of potential beneficiaries from lower overhead leaves investors with a few names worthy of consideration -- global economies or not.
The news from the Department of Agriculture echoed the projections in mid-February – wheat inventories are higher than most commodity analysts had expected. And the 19% drop in prices year-to-date can only help – particularly the big boys on the block.
Even with today’s commodities announcement what headlines do you think McDonald’s (NYSE: MCD) shareholders are likely to see? “Asian Sales Drop – Run for the Hills!” You don’t need a contrarian mindset to shelve that type of sentiment. The economic data coming out of Asia in general – and China in particular – has long been overly relied upon as the precursor for growth in any number of industries. The notion that a region the size of Asia could consistently maintain what amounted to internet IPO levels of growth was and is ludicrous.
McDonald's recently announced 1.7% same store sales drop in the Asian, Middle Eastern and African markets certainly wasn’t good news. But dwelling on that one figure while ignoring the rest of the data seems overly pessimistic - but does provide savvy investors with a nice opportunity. Lost in the doom and gloom of Asia was the 33% jump in same store U.S. sales from April – to 4.4% from April's 3.3%. May figures for Europe weren’t quite as impressive as in April but still rose 2.9% in a region beset by economic problems of their own.
Now add the overall sales increase to what is easily the best dividend in the industry at over 3%, and a trading multiple a full 20% less than $8.24 billion competitor Yum! Brands (NYSE: YUM) and McDonald's is poised. As for management, it’s worth noting the company's gross margins – and it’s not a stretch to equate the efficiencies garnered by an experienced management team can be measured (positively or negatively) by margins – is the best of the big boys by far.
Though revenues have been impacted by the need for lower prices, it should appease shareholders that McDonald’s has been able to minimize their Cost of Revenue line item at the same time. There’s that strength of management again.
Some Other Options
While there’s certainly nothing untoward about Yum! Brands and their KFC, Taco Bell and Pizza Hut chains -- among others – the company is already fairly valued and doesn’t offer the upside of McDonald’s. Sure they’ll benefit from lower costs too, but for growth and income Mickey D’s is still the best option.
For the slightly more aggressive investor Jack in the Box (NASDAQ: JACK) is an intriguing option. As shareholders know Jack made a conscious decision to ramp up marketing last year – really ramp up marketing – in an effort to jump start sales the company hopes will carry forward. If last quarter is any indication investors are on the verge of learning whether it’s worked or not. And at the lowest multiples in the industry – just as it has been for over a year – there’s a real chance the company can break through its 52-week high of $26.06.
As for another industry mainstay – Wendy’s (NASDAQ: WEN) – unfortunately Dave Thomas’ baby still hasn’t turned the corner and doesn’t appear as though they will anytime soon. Earnings guidance has consistently been revised downward and though investors want to believe – the current share prices is somewhat in line with 2013 estimates but woefully expensive based on past earnings – the company simply offers too little upside right now.
McDonald’s remains the leader of the pack – and that’s certainly not going to change. What’s nice for prospective investors is the leader also happens to offer the most value right now, and the best way to take advantage of lower overhead.
timbrugger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Jack in the Box 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. If you have questions about this post or the Fool’s blog network, click here for information.