McDonald's: Golden Arches, Golden Earnings

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Restaurant giant McDonald's (NYS: MCD) reported increases in earnings and revenue late last week. Both numbers topped expectations, and the market rewarded the company by bidding each share up by enough to cover three picks from the dollar menu with tax.

Revenues increased in all the company's operating regions. Revenues even grew in Europe despite -- or maybe because of -- the economic uncertainty there.

CEO Jim Skinner credited "investments we are making to optimize our menu, modernize the restaurant experience, and broaden McDonald's accessibility with ongoing convenience" for the growth. McDonald's menu follows the Consumer Hourglass Theory with low-priced, value items and higher price, higher-margin items. Specific menu items mentioned were "premium McCafe beverages including the new Mango Pineapple Smoothie, Chicken McNuggets, and wholesome breakfast choices, including Oatmeal and the Egg McMuffin, which generated strong comparable sales."

Plans call for over 1000 new McDonald's over the next year with over half of those opening in the Asia/Pacific, Middle East, and Africa operating regions.

Positives for McDonald's include:

  • A range of menu items that appeals to a broad spectrum of consumers.
  • Consistent performance in a weak economy.
  • A juicy dividend yield. September's dividend increase keeps the string of annual hikes dating back to 1976 intact and puts the yield over 3% even with the stock price at an all-time high.
  • A global footprint with well over half the revenue coming from outside the United States.

Negatives and risks include:

  • Increasing commodity prices that will crimp margins if those prices can't be passed on to consumers. This quarter's results saw some margin pressure from increasing prices.
  • Largely high-calorie menu items that could be affected by future regulations targeting nutritional content.
  • Exposure to currency exchange-rate risks.
  • A stock price that currently trades at a premium to the S&P 500 index.

The stock trades at a premium, but is it a good value? To help answer that question, here's how McDonald's stacks up against some companies with similar businesses.

 

PE (TTM)

5-Year Estimated Growth

Dividend Yield

McDonald's18.6810.00%3.00%
Yum! Brands (NYS: YUM) 21.0812.35%2.10%
Dunkin' Brands (NAS: DNKN) 40.0314.50%NA
Buffalo Wild Wings (NAS: BWLD) 26.0821.22%NA
Starbucks (NAS: SBUX) 27.6716.77%1.20%
Chipotle (NYS: CMG) 55.1120.30%NA

Source: Yahoo! Finance.

McDonald's and Yum! are good matches for value- or income-oriented investors. This Fool prefers (and owns) McDonald's because of the tiered menu and consistent business, but Yum!'s strong China growth story makes it a solid contender. Starbucks steps up the growth prospects and multiples, but it doesn't have the hourglass menu. Buffalo Wild Wings and Chipotle move solidly in to growth territory with no dividend, strong growth prospects, and rich valuations. Dunkin' Brands doesn't fit either pattern well. It's priced like a growth stock, but the expected growth doesn't fit the valuation.

You can keep tabs on any of the stocks mentioned by adding them to your Watchlist.

At the time this article was published Fool contributor Russ Krull owns shares of McDonald'sbut has no position in any other company mentioned. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, Yum! Brands, and Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, Chipotle Mexican Grill, Buffalo Wild Wings, McDonald's, and Yum! Brands.Motley Fool newsletter serviceshave recommended creating a position in Chipotle Mexican Grill. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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