McDonald's Is on the Value Menu
In a market filled with stocks being rewarded with soaring valuations, fast-food giant McDonald's seems to be missing out on the party. It's not being rewarded with a rising stock price nearly to the extent of its industry peers. Some of this is deserved, of course, since McDonald's same-store sales and profits have stagnated over the past year.
Still, with markets ripping to new all-time highs seemingly by the day, it's comforting to find a company with a stable business model that can offer investors a modest valuation and high dividend yield. To those ends, McDonald's seems to fit the bill.
McDonald's results last year won't whet your appetite for returns
Instead of satisfying shareholders' hunger for growth, McDonald's results last year likely gave investors indigestion. It reported a 2% revenue increase and 4% growth in diluted earnings per share. 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.
Some of this is due to changing consumer appetites. As consumers, particularly in North America, are becoming more conscious of what they're eating, they're turning away from fast food. This is why Chipotle Mexican Grill has enjoyed stronger momentum over the past year. It's not widely classified as fast food due to its reputation for lower calorie counts and fresher, better-sourced ingredients. As a result, people are deciding to eat at McDonald's less and Chipotle more.
To emphasize, consider that Chipotle registered impressive 5.6% comparable-restaurant sales growth last year amid total revenue growth of 18% . Management specifically cited increased traffic as the primary reason for its strong performance over the course of the year.
Even among fast-food purveyors, however, McDonald's still underperformed. Look at the turnaround Wendy's has been able to generate despite being just as much a fast-food company as McDonald's. Its same-store sales increased approximately 2% last year. Much of this is thanks to its 'Right Price Right Size' menu, which provides customers a choice of many varying offerings at different price points. And, due to its drastic efforts to reduce debt, its profits from continuing operations increased more than five-fold.
Where McDonald's holds advantages
Going forward, McDonald's is hoping its aggressive expansion abroad will propel growth this year and beyond. McDonald's has a great opportunity ahead in the emerging markets. McDonald's has still by no means fully penetrated underdeveloped economies. This is why McDonald's plans to spend as much as $3 billion next year to open at least 1,500 new restaurants, with most of this being allocated to the emerging markets.
This is made possible by McDonald's world-class brand recognition and its unbeatable size and scale, which separate it from fast-food peer Wendy's. For the most part, Wendy's does not yet have an established international presence. It still derives the vast majority of its sales and profits from the United States, which has a fairly saturated fast-food industry with much less compelling growth potential.
In addition, McDonald's has a leg up on both Wendy's and Chipotle in the form of valuation. McDonald's is simply a much cheaper stock than either of the other two. It trades for about 15 times forward earnings. Meanwhile, although Wendy's expects 2014 adjusted earnings per share to rise by nearly 17%, the stock trades for 25 times forward earnings. Chipotle also holds a fairly lofty valuation, exchanging hands for about 35 times forward EPS.
The Foolish takeaway
It's absolutely true that Chipotle and Wendy's outperformed McDonald's last year across most of the metrics important to a restaurant chain, including same-store sales and profit growth. But McDonald's has an ace up its sleeve in the form of emerging market growth potential. And, investors buying in today are paying a much higher price for this growth on an apples-to-apples comparison.
McDonald's trades for a much cheaper valuation than either Wendy's or Chipotle and offers a nice 3.3% dividend yield, which pays you well to wait for its growth ambitions to materialize. Wendy's pays a 2.2% dividend, and Chipotle doesn't pay a dividend at all. This consideration, when combined with valuation, means McDonald's provides much more downside protection. McDonald's is definitely on the value menu.
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The article McDonald's Is on the Value Menu originally appeared on Fool.com.Bob Ciura owns shares of McDonald's. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. 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.
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