Today, we’re looking at Dow Jones Industrial Average component McDonald’s (NYSE:MCD). Who among us doesn’t recall those kooky denizens of McDonaldland? Personally, I miss the days of Ronald, The Grimace, Mayor McCheese (“Don’tcha know?”), the original Hamburgler (who truly burgled burgers and was not the aw-shucks, friendly neo-thief of today) and the Goblins (oh, how I hated the change to “fry guys”). And who hasn’t eaten at a McDonald’s at least 10 million times?
The key driving factors regarding McDonald’s are the economy and competition. Commodity and energy prices can impact McDonald’s, but the truth is that people will always need cheap eats, and as consumer spending has decreased during the financial crisis, McDonald’s same-store sales have actually increased because of those cheap eats. Yes, there is competition, but McDonald’s has somewhere around 44% of the fast food industry’s market share. Its stores are everywhere. And because the company soaks its franchises for 6% of gross monthly sales, on top of the buy-in fee, and is constantly haranguing them to purchase expensive new equipment, there’s plenty of additional revenue on top of sales.
Stock analysts looking out five years on McDonald’s see annualized earnings growth at 10.4%, which is amazing considering how far a reach it has. At a stock price of $89 on FY 2011 earnings of $5.22, the stock presently trades at a P/E of 17. Yum! Brands (NYSE:YUM) trades at a P/E of 20.
Mayor McCheese has proudly steered McDonald’s treasury to a hoard of $2 billion in cash, against $11 billion in super-cheap (4%) debt. The company actually grew net income during the worst of the financial crisis (5.5% in 2009, 9% in 2010), and has trailing 12-month free cash flow of $4.45 billion. That’s just under twice the amount of free cash flow necessary to pay its 3.2% dividend.
Conclusion
There is no doubt about McDonald’s as a company — it represents the great American dream. It is a fantastic company on every level. The stock, however, looks very pricey. Even if we slap a 20% premium on it and give it a 12 P/E, on projected 2015 earnings of $8.35 per share, factoring in the 3.2% compounded dividend yield reinvested, we get a price target of $100. That’s only 10% from here. McDonald’s is wonderful, but for now, I’d buy only the food. The stock is overpriced at these levels.
- I believe McDonald’s is a sell for regular accounts.
- I believe McDonald’s is a sell for retirement accounts.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.
