McDonald's: Golden Arches, Golden Earnings

Restaurant giant McDonald's (NYSE: MCD  ) reported increases in earnings and revenue late last week. Both numbers topped expectations, and the market rewarded the company by bidding each share up by enough to cover three picks from the dollar menu with tax.

Revenues increased in all the company's operating regions. Revenues even grew in Europe despite -- or maybe because of -- the economic uncertainty there.

CEO Jim Skinner credited "investments we are making to optimize our menu, modernize the restaurant experience, and broaden McDonald's accessibility with ongoing convenience" for the growth. McDonald's menu follows the Consumer Hourglass Theory with low-priced, value items and higher price, higher-margin items. Specific menu items mentioned were "premium McCafe beverages including the new Mango Pineapple Smoothie, Chicken McNuggets, and wholesome breakfast choices, including Oatmeal and the Egg McMuffin, which generated strong comparable sales."

Plans call for over 1000 new McDonald's over the next year with over half of those opening in the Asia/Pacific, Middle East, and Africa operating regions.

Positives for McDonald's include:

  • A range of menu items that appeals to a broad spectrum of consumers.
  • Consistent performance in a weak economy.
  • A juicy dividend yield. September's dividend increase keeps the string of annual hikes dating back to 1976 intact and puts the yield over 3% even with the stock price at an all-time high.
  • A global footprint with well over half the revenue coming from outside the United States.

Negatives and risks include:

  • Increasing commodity prices that will crimp margins if those prices can't be passed on to consumers. This quarter's results saw some margin pressure from increasing prices.
  • Largely high-calorie menu items that could be affected by future regulations targeting nutritional content.
  • Exposure to currency exchange-rate risks.
  • A stock price that currently trades at a premium to the S&P 500 index.

The stock trades at a premium, but is it a good value? To help answer that question, here's how McDonald's stacks up against some companies with similar businesses.

 

PE (TTM)

5-Year Estimated Growth

Dividend Yield

McDonald's 18.68 10.00% 3.00%
Yum! Brands (NYSE: YUM  ) 21.08 12.35% 2.10%
Dunkin' Brands (Nasdaq: DNKN  ) 40.03 14.50% NA
Buffalo Wild Wings (Nasdaq: BWLD  ) 26.08 21.22% NA
Starbucks (Nasdaq: SBUX  ) 27.67 16.77% 1.20%
Chipotle (NYSE: CMG  ) 55.11 20.30% NA

Source: Yahoo! Finance.

McDonald's and Yum! are good matches for value- or income-oriented investors. This Fool prefers (and owns) McDonald's because of the tiered menu and consistent business, but Yum!'s strong China growth story makes it a solid contender. Starbucks steps up the growth prospects and multiples, but it doesn't have the hourglass menu. Buffalo Wild Wings and Chipotle move solidly in to growth territory with no dividend, strong growth prospects, and rich valuations. Dunkin' Brands doesn't fit either pattern well. It's priced like a growth stock, but the expected growth doesn't fit the valuation.

You can keep tabs on any of the stocks mentioned by adding them to your Watchlist.

Fool contributor Russ Krull owns shares of McDonald'sbut has no position in any other company mentioned. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, Yum! Brands, and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Chipotle Mexican Grill, Buffalo Wild Wings, McDonald's, and Yum! Brands. Motley Fool newsletter services have recommended creating a position in Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2011, at 9:12 PM, HarryCarysGhost wrote:

    Mickey D's is a great investment, especially if your reinvesting the dividends.

    I've been working on a therory that the share price moves higher every time the monopoly game comes out.

    And it happens to coincide with the launch of the McRib.

    Should be interesting to see next qtrs results.

    It's in writing now so we shall see.

    Cheers.

  • Report this Comment On October 24, 2011, at 10:03 PM, rd80 wrote:

    Interesting theory on the monopoly game - McRib technical signal.

    Combine those two events driving traffic and the dividend hike being announced about the same time the dividend hike was announced and maybe there's a triple play on.

    Thanks for the comment; always nice to know someone read the article. :)

  • Report this Comment On October 24, 2011, at 10:05 PM, rd80 wrote:

    Doh - read twice, click once - should read:

    dividend hike being announced about the same time the game kicked off

  • Report this Comment On October 24, 2011, at 10:24 PM, CommonScents wrote:

    Thanks for the MCD coverage.....do you think this stock will stop shining so brightly if we ever get out of the seemingly ever-imminent doom and gloom period that's been hanging around for the last few years? I love that my MCD is up 25% since february, but my best guess is that this stock loses some appeal when (if???) we finally stop thinking that the next massive global recession / fiscal crisis is about to crush humanity at any moment. Not that I'm selling with the thought that such a moment in time is coming anytime soon! :-)

  • Report this Comment On October 25, 2011, at 10:21 AM, rd80 wrote:

    @CommonScents

    Good question.

    About a year ago, I picked MCD for TMF's 10 Core Stocks series. Part of that research was how well the stock performed during the late '07 - early '09 bear market and during the '09 - '10 market recovery. MCD lost only a little value in the bear market and still captured most of the upside on the bull side. I expect that characteristic will continue.

    http://www.fool.com/investing/dividends-income/2010/09/23/10...

    If you expect a roaring bull market, I think MCD will do well, but won't be leading the charge. One of the reasons I own the stock is the blend of a defensive soft-market stock that can still do well if things turn up.

    Regards, Russ

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