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Using the Value Line Page: McDonald’s September 3, 2010
As of June 30, 2010, McDonald's Corporation (MCD – Free Analyst Report) operated or licensed over 32,465 fast-food restaurants in the United States, Canada, and overseas under the McDonald's banner. About 81% of those restaurants are operated by franchisees or affiliates, with the remainder under the control of the company. With foreign operations contributing around 65% of system-wide sales and about 53% of consolidated operating profits, McDonald’s is clearly a multinational company with a brand known the world over. This information can be found in the Business Description section on the Value Line Report, a free copy of which is available here for use with this article.
In the late 1990s and early in the new century, investors were concerned that McDonald’s was no longer a fast growing company. As a result, its shares dove during 2002. As the historical component of the Data Array shows, the recession of 2001-2002 led to a multi-year slide in earnings. However, the company experienced a nice earnings rebounded in 2004 and shortly thereafter a resumption of earnings growth.
The Price Chart clearly shows investors’ collective displeasure with McDonald’s shares in that period. Indeed, the stock price hit a low of $12 a share in early 2003 after trading around $30 less than a year earlier. Since that time, however, McDonald’s has proven that growth at this multinational food chain is anything but over. In fact, the recent economic malaise that has dragged down so many companies, particularly in the restaurant space, barely registered at McDonald’s. With the exception of a weak fourth quarter in 2008, which you can see in the Quarterly Earnings Per Share Box, the company has executed solidly.
This type of performance is one of the reasons why McDonald’s carries Value Line’s highest Rank for Safety (1), which you can see in the Ranks Box at the top left of the page. The company has held this lofty Safety Rank since mid-1990, a testament to its solid long-term performance. Add to this a Beta of 0.65 and it becomes clear that this fast food giant is the type of stable company in which conservative investors should be interested. (Beta is a measure of relative volatility. A number above 1.00 suggests a company’s shares will change more than a comparative index in either direction. A number below 1.00 suggests more subdued share changes.)
Moreover, the company isn’t shy about giving back to shareholders. As can be seen in the Data Array, the fast food giant has increased its dividend every year since 1994. Share buybacks since about that same time have brought the share count down from about 1.4 billion to just under 1.1 billion. Note also that a major change in dividend policy took place in the 2006/2007 time span, as the payout increased from a historical mid-teens rate up to about 50% of earnings (this can be found in the historical portion of the Data Array), and the dividend payment frequency went from a less-than-desirable once a year to quarterly (this can be seen in the Quarterly Dividend Box at the bottom left of the page).
As can be seen in the estimates section of the Data Array, we expect earnings to advance to the $6.00-a-share range over the next three to five years (estimates are shown in bold to differentiate them from actual numbers). This increase should result in an earnings growth rate of just under 10%, as can be seen in the Rates Box on the lower left of the Value Line page. Although that rate of growth is lower than over the trailing five years, it is in line with the trailing 10-year average. This will be accompanied by revenue growth in the 6.0% range over the projected period.
The company’s earnings gains and share price action have led to a Timeliness rank of 2, suggesting that the shares will outperform the average stock in Value Line’s coverage universe over the next six to 12 months (the Ranks Box contains this statistic). The solid share price performance, however, has pushed the stock to an all-time high. Indeed, this recent price discounts much of the share price gain we envision over the three-to-five-year period (the projected price range is visually depicted at the far right of the Graph by dotted lines).
Still, as the Top Label shows, McDonald’s stock yields about 3%. This is above the Value Line median (this number is updated weekly on the front page of the Index section of the Investment Survey) and earnings handily cover the payout. Add the company’s gilt-edged Financial Strength rating of A++ (found in the Ratings Box at the bottom right of the page), and there are ample reasons why a conservative investor with a longer-term view might like to own shares of this restaurant giant. One of the strongest reasons, in fact, is this U.S. multinational’s exposure to faster-growing foreign markets.
Although McDonald’s has often dabbled in new concepts, including a sold off stake in Pret A Manger (2008), and recent spinoffs of Chipotle Mexican Grill (2006) and Boston Market (2007), international growth is something the company has capably managed. In fact, as the Analyst Comment points out, sales growth abroad is outpacing domestic sales growth. With operations throughout the world, McDonald’s offers the more conservative investor a way to gain foreign exposure without having to invest in foreign stocks. This might just be worth projected total returns in the 10% per year range over the next three to five years (this calculation can be found in the Projections Box), even though that level is below the Value Line average (like the dividend, this figure is provided each week on the cover of the Index).
At the end of the day, both momentum oriented investors and conservative accounts can find something to like in McDonald’s. And, for those with a long-term focus, the current historically high price point may be worth the cost of admission to gain exposure to foreign markets via a dominant and well-regarded brand.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.