McDonald's Earnings & The Burger Industry

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On January 23, the fast food giant, McDonald’s (NYSE: MCD) released its earnings for 4Q 2012. Although analysts were expecting an EPS of $1.33, the company beat the estimates as it reported quarterly earnings of $1.4 billion ($1.38 per share). A detailed analysis on how the company performed in its latest quarter is given below;

United States

In the U.S, comparable sales increased 0.3% for the quarter and 3.3% for the year. Operating profit went up 2% for the year, while it remained the same for the quarter.

In the U.S, the company performed slightly better than it did in 3Q 2012, thanks to the introduction of new cheddar, bacon, onion sandwich in October and McRib sandwich in December. Moreover, with the addition of new grilled onion cheddar burger on the one dollar menu, things looked much better. McDonald’s would soon be launching Fish McBites, new beef sandwiches, chicken entrees, and breakfast and beverage offers that have already received a great response in the test markets across the U.S. In 4Q 2012, the company spent a lot on its marketing and will continue to do so in 2013. Having said this, McDonald’s has further plans of expanding its peak hour performance in order to attract more customers in the U.S.

Europe

In Europe, comparable sales went down to 0.60% for the quarter and were up 2.4% for the year. Operating profits were up 7% for the quarter and 6% for the year. Moreover, the company grew its market share by 0.10% to 9.2%.

As more and more customers were affected by the recent debt crisis, the restaurant industry didn’t do that well. However, according to the company, it grew its market share in Europe to 0.1% to 9.2%. Introduction of new products and selling more premium deals to the customers were major catalysts in Europe. In France for instance, the new Casse Croute Sandwich and drink deal did really well and in Germany, the McDeal value bundle with two new choices did wonders. Same is the case with U.K, where McDonald’s premium foods like Bacon, Chicken, and Onion did great.

APMEA

In Asia Pacific, Middle East, and Africa, comparable sales went down 1.7% for the quarter and were up 1.4% for the year. Operating profits went down 1% for the quarter whereas; it increased 3% for the year.

The core reason behind company’s weak performance in APMEA region was Japan’s slow recovery and China’s sluggish growth. In the case of China, McDonald’s sales decreased 0.9% for the quarter, but grew by 3.2% for the year. The recent chicken supply issue has been the major cause behind company’s low sales in 4Q 2012.  McDonald’s new web ordering system is all set to attract more customers in 2013, plus it’s also expected to reduce a significant chunk of company’s operating costs. In Australia, the company did show some resilience, thanks to new smoothie flavors, lamb sandwiches, and wraps.

Competitors

McDonald’s chief competitor, YUM! Brands (NYSE: YUM), would be reporting its 4Q 2012 earnings on February 4, 2013. Over the last few years, YUM’s most profitable market has been China. Recently, one of the news agencies in China reported that the chicken sold in YUM’s KFC restaurants contained excessive levels of chemicals. As investigations over its chicken supply became public, the company saw a 6% sales decline in December, 2012 in China. As YUM’s issue in China becomes more complicated, it would be interesting to see if YUM meets its earnings estimates. Analysts expect YUM to earn $0.82 per share on sales of $4.11 billion.

When compared to McDonald’s which is trading at a PEG of 1.85, YUM’s PEG is 1.61, which depicts that YUM is a somewhat attractive buy than McDonald’s. However, when it comes to dividends, McDonald’s is a far better option than YUM. Over the past few years, McDonald’s has remained one of the best dividend paying stocks in the U.S. A dividend yield of 3.30% tells the whole story. In case of YUM, it’s yielding a dividend of only 2%.

In case of Burger King (NYSE: BKW), it has recently announced that it won’t be doing further business with its old Irish supplier, Silvercreast Foods, as the Irish meat processor has been caught supplying horse meat instead of beef. As a result, a few of Burger King’s products would be temporarily unavailable in U.K. Currently, Burger King is trading at a forward P/E (1yr) of 24.93x, making it a rather expensive buy. A mean recommendation of 2.6 also depicts that at the moment, it isn’t as attractive as MCD and YUM. It’s yielding a dividend of just 0.90%, while its EPS is $24.46; hence, a payout ratio of only 0.65%. This points out the fact that Burger King isn’t rewarding its shareholders as it should be.

Conclusion

Although McDonald’s did beat its market estimates, it didn’t beat them by a great margin amid tough competition and a sluggish industry. The biggest news from its latest earnings release was its net sales for restaurants open at least a year, which grew by 0.1%. In the last quarter, it went down to 2.2% in Europe and U.S. This shows that McDonald’s new menus in U.S. and Europe are finally driving sales. Hence, 2013 is all set to be a better year than 2012.

McDonald’s has averaged a dividend increase of almost 29% during the last ten years. Recession or no recession, McDonald’s dividend has always been on a high. This is a proof that the company’s chief objective is to satisfy its shareholders. The latest dividend increase of 10% to $0.77 is also a testimony to this. The bottom line is that, though the company has gone through a somewhat rough patch in the last year, it’s gradually picking up and is still one of the best dividend paying stocks in the country. In short, hold McDonald’s for long term returns. You can have a further look at our analysis on McDonald’s here.

 


Vamosrafa7 has no position in any stocks mentioned. 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!

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