3 Reasons to Buy McDonald's
Jul 28th 2012 11:10PM
Updated Jul 28th 2012 11:12PM
McDonald's (NYS: MCD) frequently satisfies the bellies of hungry consumers. For the most part, shareholders can say the same, but recently reported company earnings have investors thinking twice. Despite the below-consensus numbers and present challenges in the fast food space, the company's ubiquitous brand, mighty financials, and global dominance pack a powerful punch.
Let's take a closer look at why you should consider McDonald's for a portion of your portfolio.
Lovin' its brand loyalty
Regardless of your feelings about it, you know a company has amazing brand recognition when your 2-year-old niece knows who Ronald McDonald is. Pint-sized Happy Meal consumers and senior coffee sippers alike are fiercely loyal to Mickey D's. That's how the company has firmly secured a top 10 spot on Interbrand's "Best Global Brands" since the rankings inception in 2001.
Over the past several years, McDonald's has undergone a refresh by placing renewed emphasis on brand imaging, launching premium products, offering healthier menu options, and remodeling restaurants. And these efforts have paid off: McDonald's enjoyed its ninth consecutive year of same-store sales growth last year. And despite the hard-hitting Great Recession, total revenues grew nearly 19% from 2007 to 2011. In fact, Mickey D's secured the top spot as the best-performing company in the Dow for 2011.
Being the mature, low-cost provider it is, McDonald's has the scale to deal with higher input costs resulting in large part from the U.S. drought. Its brand loyalty puts it in a favorable position versus its peers to increase prices without losing swarms of customers.
I'll have a side of McMighty financials
The company's solid cash position, robust comparable-store sales and guest counts, increasing margins, and strong free cash flow have all contributed to its success.
5-Year Stock Performance
Forward P/E Ratio
|Chipotle Mexican Grill (NYS: CMG)||255%||0||27|
|Panera Bread (NAS: PNRA)||293%||0||23|
|Yum! Brands (NYS: YUM)||99%||1.80%||17|
Source: Yahoo! Finance.
Just a glance at those numbers reminds us that there exists no perfect investment; there's give and take and the balancing of risk and return with all investments. While McDonald's shareholders gave up returns in comparison with some competitors (although 81% over five years is nothing to sneeze at -- the Dow lost 4% in same period), the stock appears to be trading at an attractive value relative to its peers and the industry average P/E of 18.
Sterling outlook for more Golden Arches
McDonald's derives 32% of its total revenues from the U.S., 40% from Europe, and 22% from its Asia/Pacific, Middle East, and Africa (APMEA) segment, collectively. In this APMEA segment, McDonald's saw its income contribution double over the past six years. Within this high-growth segment, 55% of revenues are from China, Australia, and Japan.
The Golden Arches is slated to open 225 to 250 restaurants in China this year, with the goal of reaching 2,000 locations in the country by the end of 2013. Considering the current Chinese population of 1.31 billion, this would put the number of Chinese to a single McDonald's location at 655,000. By comparison, the 14,000 U.S. locations wait on 314 million inhabitants, equal to serving on average roughly 22,500 Americans per location. Three small words: massive upside potential.
But slowing economic growth in China and a lackluster second quarter for the company have investors thinking twice. Second-quarter 2012 earnings-per-share results were slightly below analyst estimates. McDonald's chalks up the challenging quarter to a strong U.S. dollar, high commodity costs, and weak European sales. Had currency rates been stagnant, McDonald's would have reported year-over-year growth in operating income and earnings per share for the second quarter.
While this serves as a reminder that what happens around the globe affects us here at home, the company's second-quarter results don't signal trouble in the minds of long-term-focused shareholders. In fact, I'd argue that it presents a great buying opportunity. McDonald's shares are down roughly 4% since the company's earnings announcement.
McDonald's is worth a look because of the company's ubiquitous brand, solid financials, and global growth opportunities. Currently trading closer to its 52-week low than its high, this presents a supersized opportunity for long-term investors to take a closer look at this formidable fast-food giant.
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The article 3 Reasons to Buy McDonald's originally appeared on Fool.com.Fool contributor Nicole Seghetti owns no shares in any of the companies mentioned. In the spirit of full disclosure, she does enjoy a good McFlurry. You can follow Nicole on Twitter, @NicoleSeghetti. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. Motley Fool newsletter services have recommended buying shares of Panera Bread, Chipotle Mexican Grill, and McDonald's. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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