Stocks for Dad
McDonald's

By Selena Maranjian (TMF Selena)
June 13, 2000

Trading at $33 7/8 as of June 9, 2000

Happy Father's Day, Pop!

It's that time of the year again, when I'll toss out a company you might want to take a closer look at, to see if you think there's a place for it in your portfolio. I know that both you and I are most taken with young, dynamic companies that are growing quickly. But, we've both got plenty of those in our portfolios. I've been thinking that it might be a good time for us to focus on some more stable, slower growers. So, here's this year's idea:

McDonald's (NYSE: MCD).

I know, it's not exactly the kind of company that gets your adrenaline racing, eh? But, if you deem it worthy of a few investment dollars, it's the kind of company you won't have to keep super close tabs on. You'll be free to maybe just check in on it once a quarter or every six months -- attending instead mainly to working on crossword puzzles, looking out for yellow-shafted flickers, and hunting for sales on corn and apples at the supermarket.

Here's a quick overview from the horse's mouth: "Every day McDonald's serves more than 43 million people in more than 25,000 restaurants in 118 countries around the world. That's over 15 billion customer visits annually." If you think this means the company has little room for growth left, consider the rest of that paragraph: "...yet on any given day that is less than 1% of the world's population."

I've done a little legwork looking into McDonald's (NYSE: MCD), and here are some of my thoughts on it so far.

Things I Like About McDonald's

• It's understandable. No routers, switches, or fiber optic technology. Instead, it's all about french fries and burgers and elephantine "cups" of soda.
  
  
• It's an American icon. Indeed, at this point, it's an international icon. Most people on this planet are probably familiar with the company and its offerings. McDonald's is busy implanting itself in just about every nation on Earth. And, it's trying to adapt to local needs. In Sweden, it offers "ski-thru" service. In Hong Kong, it offers Red Bean Sundaes and Curry Potato Pie. In Japan, the Teriyaki McBurger. In Chile, McPalta sandwiches are served with avocado. In Rome, you can order a Marinara salad, with shrimp and salmon.
  
  
• McDonald's has a very investor-friendly website. Its "Investor" area features the company's vision, history, an investor overview fact sheet, financial press releases, annual report, proxy statement, downloadable financial information, SEC filings, historical stock prices and charts, information on its annual shareholder meetings, and more. Some nice touches include a ready-to-download investor information report formatted in the NAIC (National Association of Investors Corp.) style -- showing the company meeting investors on their own terms. It also offers info on its "McDirect" stock purchase plan. A somewhat unusual additional offering is highlights from the company's biennial analyst meeting.
  
  
• I also admire McDonald's for its product innovation. Believe it or not, this is a "tech stock." (Of course, these days, almost every successful company is using and developing technology in some vital way.) It's continually tweaking and improving its logistical systems, its food preparation processes, and more. The company's recent purchase of Boston Market may lead to some new developments, as well.
  
  
• Its growth. In 1999, the company added about 1,800 new restaurants to its chain, roughly 90% of which were international. (There are now 3,000 restaurants in Japan and 1,000 each in Germany and the U.K.) Management is committed to maximizing shareholder value through increased earnings per share (EPS) and free cash flow. Excluding adjustments for foreign currency fluctuations, the company expects to increase EPS by about 10-15% each year. Not too shabby for a company with more than $38 billion in annual revenues. The company is applying much of its hefty free cash flow toward repurchasing shares. Over the past decade, McDonald's has achieved a compound total annual return for shareholders of 18%.
  
  
• Its numbers. True, gross margins in the neighborhood of 35% pale next to those of Microsoft or Yahoo! But, when stacked against competitors such as Wendy's (NYSE: WEN) (17%), they're kind of impressive. Its return on assets is north of 16% and rising. Its international return on investment hovers around 20% for established units. Return on equity is about 21%. Free cash flow topped $1.1 billion in 1999, a 29% increase over 1998.
  
  
• The company's social responsibility. I remember years ago when I was dining at a McDonald's with an environmentally concerned friend. He made a small scene, refusing to accept his burger in a Styrofoam container -- and he clearly wasn't alone in his dislike for the plastic boxes. Today the Styrofoam is gone. The company responded to customer concerns.
  

McDonald's dedication to helping families going through difficult times with sick children is more than lip service. There are Ronald McDonald Houses all over the world -- in nations such as France, Hungary, Sweden, Italy, and Hong Kong. In Russia, more than $4 million has been donated to local charities. In the company's own words, "Over the past 10 years in the U.S., McDonald's has eliminated 150,000 tons of packaging, purchased more than $3 billion of recycled products, and created pioneering energy-efficient restaurants."

It's easy to chuckle at McDonald's in the context of social responsibility -- focusing on the fact that it serves products that can contribute to heart disease. But, truth be told, the company has often tried to offer more healthful products, but so far none have proven as popular as its traditional fare. I expect to see the company continually experimenting with healthier wares. (Actually, its popular McSalad Shakers are a step in the right direction.)

I might have painted a pretty picture so far, but this is just the tip of the iceberg. You'll need to read and think more before coming to any conclusions. Check out the recent "Dueling Fools" feature on McDonald's -- where my colleague Bill Barker raises some questions about the big arches, and Rick Munarriz answers many of them.

Next: Panera Bread Co. »

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A Stock for Dad represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.

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