A Closer Look At This Food Giant

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The world’s largest hamburger chain, McDonald’s (NYSE: MCD), serves over 68 million customers in 119 countries. All McDonald’s restaurants are either operated by the corporation, franchisee, or an affiliate.

Recent Developments

McDonald’s expanding in Russia

McDonald’s has recently announced that it would be expanding itself in Russia as its rivals keep on increasing their presence in the region. The company has more partners lined-up this year after making Rosinter its first franchisee last year.

Russia CEO Khamzat Khasbulatov said, “Beyond the Urals, we are interested in Western and Eastern Siberia, and we are also considering franchising out restaurants in (Russia’s western) enclave of Kaliningrad”.

According to the company, it would operate its business through franchises where it’s less profitable to go for self-operated restaurants. By the end of this year, Rosinter would be opening its first restaurants in St Petersburg and Moscow. During the next three years, McDonald’s has plans of opening more than 150 self-operated restaurants in Russia.

Menu Changes at U.S. Restaurants

McDonald’s has decided to cut its Fruit & Walnut Salad and Chicken Selects from U.S. menus. Plus, the company is also in the process of deciding whether to keep its premium Angus burgers on the menu or not.

McDonald’s has dominated the burger industry for years but rivals such as Wendy’s and Burger King are now closing the gap on the burger giant. This latest move comes as a reaction to these chains which have recently done well with their new menus.

Regarding these latest menu changes, McDonald’s spokeswoman, Danya Proud said, “As always, we are constantly evolving our menu and listening to our customers to meet their changing needs”.

January Sales Drop

According to McDonald’s, January sales at its restaurants around the world have fallen to 1.9%, 0.8% more than the analysts’ estimates. In January, 2012, same store sales grew by 6.7%. February, 2012 sales would be hard to beat as the month had an extra day due to the leap year. In February, 2012, McDonald’s recorded a sales growth of 7.5%. Slow economic growth has been the chief culprit behind this weak sales figure.

Valuation

McDonald’s is trading at a forward P/E (1yr) of 15.27x and has a PEG of 1.88. Incorporating a healthy dividend yield of 3.20% in its PEG gives us a PEGY of 1.41. Using an industry forward P/E of 17.6x, I would value McDonald’s.

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Using consensus estimates for 2013, I value McDonald’s at $102. This shows that it’s undervalued by 6.25%. By adding its dividend yield into this we get to a total return of almost 9.5%.

Competitors

Just like McDonald’s, YUM! Brands (NYSE: YUM) has announced that it would be opening 70 restaurants in Russia and former Soviet countries this year. The company is also looking for a new franchise partners in the region. YUM’s business in China has seen a substantial drop after the Chinese investigations revealed that its KFC chicken had excessive levels of antibiotics in it. As a result, the company has now cut off ties with more than 1,000 slaughterhouses in the region.

YUM is trading at a forward P/E (1yr) of 17.93x and has a dividend yield of 2.10%. YUM appears to be an average buy for the short run but it’s a great buy for the long run. You can have a look at my detailed take on YUM here.

On the other hand, Burger King Worldwide (NYSE: BKW) is trading at a forward P/E (1yr) of 20.36x, making it one of the expensive buys in the burger industry. It has a PEG of 1.37 and a dividend yield of 1.10%. A mean recommendation of 2.6 on the sell side suggests that it’s one of the better buys in the industry but not the best. Therefore, I won’t recommend buying Burger King Worldwide at this stage.

Conclusion

With the U.S. economy recovering at a sluggish pace, consumers are cautious in spending their hard-earned money--January sales figure is a testimony to this. The first half of 2013 doesn’t look that bright for the company. As a result, I remain neutral on McDonald’s in the short run.

As the U.S. economy facing another risk of economic recession, people are moving away from the premier food products. The latest move from McDonald’s to cut off its “extra products” from its menu seems to be the right one. McDonald’s is not only battling with slow economic growth but also with tough competition in the market. McDonald's strategy of altering menus with changing customers' needs appears to be bang on target. The recent re-introduction of the dollar menu is an example of this, which has been doing really well in the market.


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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