What Investors Should Expect From McDonald's

You might not enjoy eating at McDonald's (MCD -0.91%), but if you're an investor then you have to at least recognize the popularity of the brand. Many investors have been saying that McDonald's isn't what it used to be, but they might have forgotten one of the most important rules on Wall Street: The winners keep winning. 

Understanding McDonald's
Prior to investing in any company, you should first understand how it operates. Of course, we all know that McDonald's serves burgers and fries, has added many healthy menu items over the past several years, often has a playground on the premises to attract families, and that Ronald McDonald might show up at a birthday party wearing candy-cane-striped sleeves, a yellow jumpsuit, and a somewhat disturbing clown-like grin. 

What some people might not know is that of the 34,923 McDonald's restaurants, 20,117 are run by conventional franchisees. This is very important because it allows McDonald's to keep costs low, which then leads to big profits and shareholder rewards. This approach also leads to individual McDonald's restaurants offering locally relevant experiences with their decor and menu options.

There are 6,642 company-owned restaurants, which are important because they maintain the brand's credibility, develop and refine operating standards, establish marketing concepts, and determine product and pricing strategies.

McDonald's aims for long-term sustainable profitable growth by delivering on the following initiatives:

• Optimize menu with compelling food and beverage options
• Modernize customer experience
• Broaden accessibility
• New store expansion
• Offering value

McDonald's also follows a "Plan to Win" strategy, which pertains to People, Products, Place, Price, and Promotion. Many companies have catchy names for their company strategies, but what really matters is results. McDonald's has now seen visits and comps grow for nine consecutive years. Those are good results.

Now let's take a look at recent performance and determine whether or not McDonald's is likely to be a better long-term investment than Burger King Worldwide (BKW.DL) and Wendy's (WEN 1.62%).

The past nine months
Most investors like to look at quarterly performance. Quarterly results are important, but a nine-month time frame offers a larger sampling.

Over the past nine months, comps increased 0.3% year over year. McDonald's cited flat and declining eating-out markets as the primary culprits for the uninspiring performance. What's a little worrisome is that McDonald's expects this challenging environment to persist for the rest of the year. For McDonald's bulls, or potential McDonald's bulls, there is good news that's likely to offset this prediction. Let's look at the breakdown of comps numbers first.  

Over the past nine months, U.S. comps increased 0.2%. Despite a highly competitive and promotional environment, McDonald's managed to deliver a slight improvement in comps, which it attributes to new product introductions, core favorite strength (menu items), and its Monopoly promotion in the third quarter.

Europe didn't fare as well, with comps declining 0.3%. While the U.K., Russia, and France performed well, Germany was a drag. Looking ahead, McDonald's plans on enhancing its premium beverage and menu items and offering them at affordable prices during all times of day and night.

Asia-Pacific, the Middle East, and Africa (aka APMEA) saw comps slide 1.7%, with the weakest performers being Japan (major presence), China, and Australia. Looking ahead, McDonald's plans on offering more breakfast items, modernizing its restaurants, and expanding its store base.

The good news is that over the past nine months, diluted EPS improved 5% to $4.16 year over year. McDonald's repurchased $1.3 billion worth of its own shares and paid $2.3 billion in dividends. Better yet, McDonald's expects to return between $4.5 billion and $5.0 billion for the year.

The point here is that as long as McDonald's can hold its own on the top line it will continue to generate big profits, which means more capital distributed to shareholders. 

McDonald's vs. Burger King and Wendy's
McDonald's saw comps increase 0.9% for the third quarter, which matches Burger King's results. Therefore, despite all the recent excitement about Burger King, McDonald's has been performing just as well on a comps basis.

Burger King has enjoyed comps growth in Europe, the Middle East, Africa, Latin America, the Caribbean, and Asia-Pacific. Burger King has seen negative comps growth in the U.S. and Canada, but its Satisfries are expected to enhance customer experience and help drive profitability.

We won't know Wendy's third-quarter results until Nov. 7. What we do know is that Wendy's is following up its Pretzel Bacon Cheeseburger success with the Pretzel Pub Chicken, using social media to pique the interest of potential diners.

For instance, Wendy's #PretzelLoveStories brings consumers into the spotlight. Wendy's once again demonstrated impressive innovation to entertain audiences and increase its exposure.  

While Burger King and Wendy's certainly have potential, they're still not quite as strong as McDonald's. Consider some key metric comparisons:

Source: Company financial statements.

McDonald's sports the highest profit margin while trading at the most appealing valuation. It also offers the most generous yield.  

The bottom line
McDonald's has always been a winner. That's not going to change overnight. Investors aren't likely to see exciting stock appreciation at this point, but some stock appreciation combined with a generous yield and resiliency is often a recipe for long-term success.