Please ensure Javascript is enabled for purposes of website accessibility

Why McDonald's Can Still Satisfy Your Hunger

By Bob Ciura – Feb 1, 2014 at 7:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors disappointed by McDonald's 2013 report are missing the big picture. Despite a challenging year, McDonald's remains a world-class blue chip stock.

It seems McDonald's (MCD 0.07%) can do no right. Consumer preferences, particularly in the United States, continue to shift away from fast food in favor of fresher, healthier alternatives. In addition, McDonald's is under immense pressure from smaller rivals. Considering how much stress is on McDonald's, you'd think 2013 would have been a disastrous year for the company.

Somehow, though, McDonald's still grew last year. The company's full-year results are out, and despite a wave of negative sentiment from the investing community, it seems prudent to point out what the company still does well. That is, producing top-line and bottom-line growth, generating gobs of cash flow, and rewarding shareholders with billions of dollars in share buybacks and dividends.

Take a breath, don't panic
McDonald's fourth quarter and full-year report immediately set off a wave of negative sentiment from the analyst community and financial media. While it's true that 2013 was by no means a spectacular year for McDonald's, a fairer, more accurate view seems to be that last year was a mixed bag. While McDonald's certainly has things it needs to improve upon going forward, there were certain pockets of strength last year.

In all, McDonald's reported 2% revenue growth and 4% growth in diluted earnings per share. Its revenue breakdown showed some positive aspects, as well as some negatives. Global comparable-store sales, which include sales only at locations that were open for at least one year, inched up 0.2% during the year. Guest traffic as a whole declined, but customers spent more on average.

The headline growth numbers probably disappointed, but it's worth noting the market reaction upon digesting McDonald's results. The company's stock didn't crash, but rather was up modestly on an otherwise terrible day for the markets. That seems to imply that the market is relatively comfortable with where McDonald's currently sits, and that its issues have been known for some time.

McDonald's results shouldn't be tough to digest
Some investors may be disappointed by McDonald's lack of strong growth, but we need to be realistic at the same time. McDonald's is not a growth stock. It's a very mature company that operates in a saturated and highly competitive industry. Future growth will still be achieved, however, particularly from under-developed markets. The emerging markets present a viable avenue for future sales and profit growth. This is why McDonald's plans to open at least 1,500 new restaurants as well as perform over 1,000 renovations in the year ahead.

The lack of growth isn't a McDonald's-specific issue. Changing consumer habits in developed markets are affecting the fast food industry as a whole. It should come as no surprise that the BRIC nations (which include Brazil, Russia, India, and China) are the next geographies targeted by the fast food industry for future growth. That's why Yum! Brands (YUM -0.22%) expects to open at least 1,850 new restaurants outside the U.S. in the year ahead, which includes 700 new units in China and 150 new units in India.

Investors might trash McDonald's in light of its tepid performance against rivals such as Wendy's (WEN 0.26%). It's true that growth at Wendy's has been impressive, but not overwhelmingly so. For example, Wendy's expects 1.9% same-store sales growth in 2013, along with 10% operating income growth. Plus, Wendy's stock is fairly expensive: shares trade for 30 times its 2013 adjusted EPS.

McDonald's: Steady as she goes
By contrast, McDonald's stock exchanges hands for 17 times its 2013 EPS. And, investors are offered a 3.4% dividend as additional downside protection. Put simply, while its competitors may still have room to run, McDonald's remains a safer option.

There's no doubt that McDonald's whiffed on its strategic initiatives in 2013. Its new menu options like its Mighty Wings were a flop. But investors are missing the bigger picture, and that is McDonald's is simply a world-class brand that generates extremely high business returns.

Bob Ciura owns shares of McDonald's. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. We Fools may not 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.

Stocks Mentioned

McDonald's Stock Quote
$271.77 (0.07%) $0.18
Yum! Brands Stock Quote
Yum! Brands
$130.62 (-0.22%) $0.29
The Wendy's Company Stock Quote
The Wendy's Company
$23.17 (0.26%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.