McDonald's Monster Margins

Don't pay any attention to negative press about fast-food giant McDonald's (NYSE: MCD  ) , as there are many more positive things to note. It's huge and growing, is globally diversified, and pays a solid dividend. From an investor's perspective, however, perhaps nothing is more impressive to note than its net margin -- the proportion of revenue that's left over once all expenses and obligations have been met.

Take a look at the chart below.

Source: Yahoo! Finance.

As you can see, the Big Mac maker's 20% net margin is more than three times the same figure for the restaurant industry and almost twice that of the average company on the Dow Jones Industrial Average (INDEX: ^DJI  ) . Its closest competitor in this regard, if you could call it such, is the Cajun-themed drive-thru chain operated by AFC Enterprises (Nasdaq: AFCE  ) , Popeyes Chicken & Biscuits.

Other drive-thru giants such as newly listed Burger King (NYSE: BKW  ) and China-focused Yum! Brands (NYSE: YUM  ) -- the proprietor of KFC, Pizza Hut, and Taco Bell -- come in at 5% and 12%, respectively.

So why does this matter?
It matters because it suggests that McDonald's may be trading for a relative discount at 16.8 times earnings, or that its more highly priced competitors like Yum! and Wendy's are trading for unreasonable premiums at 21.1 and 59.8 times earnings, respectively. Indeed, by this measure, other than Jack in the Box, which trades for 16.1 times earnings, McDonald's stock is the least expensive of the group.

It also matters because of what it says about growth. Namely, for every incremental dollar in new sales, McDonald's brings home nearly twice the amount as, say, Yum! does. Thus, while analysts may be more focused on Yum!'s top-line growth, and particularly in China, perhaps they'd be better served by looking at McDonald's bottom line.

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Foolish contributor John Maxfield does not own shares in any of the companies mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services have recommended buying shares of McDonald's. The Motley Fool has a disclosure policy. We Fools may not 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.


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