Why Big Macs Are Here to Stay

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McDonald’s on 39 Union Square West (between 16th St & 17th St)

By: Teck Lim

McDonald’s Corp. (MCD)NYSE
Sector: Service
Industry: Restaurant

Some Key Stats:
Market Cap: 87.44B
Current Price: 86.71
52wk Range: 85.92- 102.22
P/E: 16.33 (Industry average is 20.21)
EPS: 5.31 (Industry average is 0.39)
EBITDA: 9.77B (Industry average is 48.4M)
Operating Margin: 30% (Industry Average 9%)
Dividend Yield: 3.5%
37 years of uninterrupted dividends- solid management

At the current price of 86.71, MCD is close to its 52wk low (85.92) and offers a relatively low entry point for investors. The decline in share price has been a result of two earning misses this year (Q3 latest), global economic weakness, rising food prices, and stiff competition from restaurants such as Burger King (BKW), Chipotle (CMG), and Yum! Brands (YUM).

Below is a basic 1-month chart (October) of MCD from Yahoo! Finance:

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While MCD faces these challenges, the company has been consistently strong throughout history. Several reasons suggest why this current stock price slump is temporary in nature.

  1. Long-Term Investing: MCD has a strong management structure that has been time-tested. The company’s track record shows that they know how to employ sustainable growth – growing at a steady pace, but not letting growth overcome them. While the stock moves quite slowly and usually does not offer exciting short-term growth, long-term investors have been rewarded nicely.
  2. Staying Ahead of the Curve: Stiff competition is common in the restaurant industry, and while MCD seems to have suffered from this very factor quite recently, closer analysis of the company’s strategies and product implementations show that they have been staying ahead. More restaurants are beginning to offer healthier alternatives – MCD has already been doing that for several years now. More restaurants want to take some market share in the breakfast scene – think MCD’s Egg McMuffin since 1971. MCD continues to stay ahead of the curve by constantly trying to push new grounds. They announced on October 25th that they will begin to sell bagged coffee in Canada from November 8th, further expanding their strategy to take more market share from the coffee/breakfast industry.
  3. Customized Menus: In efforts to sustain long-term growth, MCD’s strategy has been to offer value for meals, while also implementing customized menus across different regions to satisfy local tastes.
  4. Continued Franchise Growth: More shops means more sales, which potentially means more profits. MCD plans to open 30 more Canadian stores by the end of 2012 and 250 more stores in India by 2015.
  5. Brand Strength: Over the years, MCD has developed strong brand recognition globally and continues to do so with active marketing, like being a major sponsor in the 2012 London Olympics. Think back to “Super Size Me”, when all kids recognized Ronald McDonald and not Jesus. That is the power of the company’s brand.

Below is a basic 5-year chart (2008-2012) of MCD from Yahoo! Finance:

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Looking at the company’s quarterly cash flow, there was a net gain in change in cash and cash equivalents from the previous two quarters. Looking at yearly cash flow, there was a slight contraction in the year 2011. This coincides with a struggling macroeconomic landscape.

Looking at the company’s balance sheet, debt-to-equity ratio is healthy at 0.58, which means the company has the minority of its financing through debt. The higher the ratio, the more risk the company holds in financing current and future debts. For this recent quarter dated Jun 29, 2012, MCD reported total assets of 33,332,400,000 and total liabilities of 19,297,300,000.

The company has an enormous goodwill value 2,680,700,000, which shows its high reputation among customers. Looking at annual data, the company’s goodwill has increased year upon year from 2009-2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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