Is McDonald's the Perfect Long-Term Investment?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This morning as I drove from place to place running errands I must have driven past four or five McDonald’s (NYSE: MCD) restaurants. I wanted to get breakfast, but the drive-thru windows at each of the restaurants was packed. I could not help but think that McDonald’s must be turning a great profit.
McDonald’s has its headquarters in Oak Brook, Illinois. However, it is truly an international company. McDonald’s has 33,510 restaurants in 119 countries. The company’s stock price is around $96, and it has a market cap of around $98 billion.
McDonald’s reported first quarter earnings on April 20th. The company reported earnings per share of $1.23 which matched consensus analyst estimates. The $1.23 per share was a 6.9% increase from the first quarter of 2011. The company reported first quarter revenues of $6.55 billion, which was a 7% increase from revenues of $6.1 billion in the first quarter of 2011. Net Income was $1.27 billion which was a 5% increase from net income of $1.21 billion in the first quarter of 2011.
The report mentioned that McDonald’s increased earnings in each of its marketing regions. In the United States same store sales increased by 8.9%. In the Asian, Pacific, Middle Eastern, African, China, Australian and Japanese regions sales increased by 5.5%. In Europe sales grew by 5%. The increased earnings were driven by McDonald’s increasingly diverse menu, which included new additions to the value price menu as well as regionally selected limited-time offers that are called promotional food events.
Stock prices in the retail restaurant stock have been on fire. Investors have appreciated McDonald’s earnings growth and the stock price has reflected that. Over the last 52 weeks McDonald’s stock price has increased by 24% while YUM! Brands (NYSE: YUM) stock price is up by 39%, Chipotle Mexican Grill’s (NYSE: CMG) stock price is up by 57% and Buffalo Wild Wings (NASDAQ: BWLD) stock price is up by 39%. Competitively, Yum! brands is way ahead of McDonald's in terms of its international footprint. Yum!'s store count in China is now over 3700 (for its KFC brand) and over 700 for Pizza Hut. Store and sales growth in Malaysia, Australia and the Philippines has also been very strong. Chipotle and Buffalo Wild Wings, have practically no international sales. Buffalo Wild Wings has so far expanded to 825 locations with 80% franchisee-owned, and the company is targeting 1,500 total stores, stateside. Chipotle has approximately 1230 restaurants.
McDonald’s has the greatest name recognition of any restaurant in the world. It is a truly international company, hich can withstand regional recessions. McDonald’s stock performance has been excellent. The stock is up by 24% over the last 52 weeks and 92% over the last three years. Furthermore, McDonald’s dividend payout is generous. The dividend is $2.80 per share with a yield of 2.9%. McDonald‘s has increased its dividend by 86.6% over the last five years and has raised its dividend for 35 consecutive years.
The company is gaining market share with the introduction of its breakfast menu and its cleaner and more modern restaurants. Despite the fact that McDonald’s stock price has been moving higher, its valuation ratios (price to earnings ratio 18/price to book ratio 6.7/ price to sales ratio 3.5) are still lower than most of its competitors. The reason that McDonald’s stock valuations is lower than its competitors is because it is considered to be a mature company with limited sales growth. I however prefer McDonald’s to its competitors because it is a bellwether company that has grown earnings and paid dividends for more than 30 years.
McDonald’s stock price has decreased by 4% during 2012, due to investors worries about further downturns in the European economies. McDonald’s must also deal with a slowing Chinese economy. Some investors have worries about McDonald’s future because “Chief Executive Jim Skinner last month announced his retirement after 41 years with the company, allowing President and Chief Operating Officer Don Thompson to take the helm in July.” Even though McDonald’s stock price has consistently moved higher, it has lagged behind competitors such as YUM! Brands, Buffalo Wild Wings, and Chipotle Mexican Grill. While McDonald’s has been consistent in growing revenues and net income, its earnings have not grown as fast as some of its competitors. For example, Chipotle Mexican Grill first quarter sales rose 26% while net income rose 35%. McDonald’s near term stock appreciation may not match its competitors, but I believe that its consistent growth will enable it to outperform other retail restaurants over the next three years.
McDonald’s is not the sexiest or the fastest growing company in the retail restaurant sector. However, it is arguable the most consistent, and most trusted company in the sector. The company has increased revenues and net income in each of the last three years, and over that period of time, the stock price increased by 92%. In addition, the valuations are reasonable and the dividend yields a fat 2.9%. These are not blow out numbers, but these are the kind of attributes that make owning stock in McDonald’s attractive to conservative long term investors. I recommend McDonald’s for investors with a long-term horizon.
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