The world’s biggest restaurant chain, McDonald’s (NYSE:MCD), reported upbeat third-quarter results last Friday The stock jumped more than $2 on the news, hitting an all-time high near $92. (On Monday, the stock was off 0.4% to just under $92.)
Despite the upward momentum, both the technical and fundamental pictures point to further growth. And with a solid 3.1% forward annual dividend, the world’s leading hamburger chain looks to be an attractive long-term investment opportunity.
Help driving growth is the new dining “experience” McDonald’s is creating, featuring an upgraded menu and storefront.
In an attempt to revive its image, McDonald’s undertaking a billion-dollar make-over plan, with the goal of redesigning 14,000 U.S. outlets by 2015. The carnival-like colorful plastic appearance will be replaced with higher-end wooden tables, faux leather chairs and a more subtle color scheme.
And, in an attempt to attract a higher-paying market and diversify beyond the young male audience that currently accounts for the majority of the chain’s market share – McDonald’s is expanding its menu selection with more upscale, health-conscious choices, like oatmeal and fruit smoothies.
High-margin beverages, like coffee and smoothies, are helping further boost sales as are low-priced “recession-proof” value items like the $1 burger and classic Chicken McNuggets. As a result, in September, global same-store-sales increased 6.6%, well above the 3.6% analysts expected. October same-store-sales are projected to increase 5%.
As a multinational restaurant franchise, with nearly 33,000 outlets across the planet, it would seem the fast-food company would have little room to grow. But, in fact, McDonald’s has an expanding — and well-received — presence in China. And in Europe, the company’s largest market that accounts for about 40% of sale, McDonald’s plans to grow through cost-cutting by ultimately replacing cashiers with self-serve touch panels.
The intended changes appear to be sitting well with shareholders.
Technically, the stock is rocketing upward and shows no signs of slowing down.
Shares have been on a major uptrend since October 2009. In March 2011, the stock briefly touched an important level of support, near $71, which at the time represented the intersection of the major uptrend line.
However, instead of falling through support, MCD catapulted in the other direction, forming an accelerated uptrend line.
For much of the fall, the stock has been testing resistance around $91.50. Generally, the more times resistance is tested, the more likely it is to eventually break. Last week, the stock finally managed to pierce through resistance, bullishly completing an ascending triangle pattern. When a triangle is bullishly broken, the trend is usually up.
According to the measuring principle for the triangle, which is calculated by adding the height of the triangle ($91.22-$72.40=$18.82) to the breakout level ($91.22), shares could easily reach a target price of $110.04 ($18.82+$91.22). However, with no historical resistance in sight, the stock could soar much higher. At current levels, there is potential for 20% gains.
From a fundamental outlook, McDonald’s also show strong growth potential.
Third-quarter revenue and earnings both topped analysts’ expectations – a trend carried forth from the first- and second-quarters.
Due to strong global sales of new menu items, third-quarter revenue increased 13.8% from the year-ago period to $7.2 billion. Analysts only expected only a 11.3% increase.
For the full year, analysts project revenue will increase 11.2% to $26.7 billion. And, with an expanding target market, analysts expect 2012 revenue will increase an additional 5.3%.
The earnings outlook is equally positive.
Third-quarter earnings beat analysts’ estimates, and for the full year analysts expect earnings will rise 13.1% from last year to $5.19 a share. By 2012, analysts project a further 9.8% increase, to $5.70.
Although the company is richly valued, it does have a solid return on equity of about 37%.
The company also offers an attractive forward annual dividend of about 3.1%. And this dividend is not likely to go away anytime soon. The company has been steadily increasing its yield since 2008.
With a rising dividend, bullish techicals and a strong fundamental outlook, McDonalds may just be the stock to beef up your investing portfolio.
At the time of writing, Deborah O’Malley did not own any of the stocks mentioned in this article.