Should I Buy McDonald’s? 3 Pros, 3 Cons

by Tom Taulli | May 8, 2012 1:32 pm

mcdonalds Should I Buy McDonald’s? 3 Pros, 3 Cons[1]While McDonald’s (NYSE:MCD[2]) posted same-store sales growth of 3.3% last month — on a global basis — it wasn’t good enough for Wall Street. The consensus estimate had been 4.3%.

The stock price is off by 1.28% on the news in today’s trading. For the year, MCD is off about 4%.

Is this temporary? Or is there something fundamentally worrisome? To see, let’s take a look at the pros and cons:

Pros

Huge Scale. McDonald’s has one of the most valuable brands and operates more than 33,500 locations across 117 countries. Because of its size, it has tremendous leverage to force lower prices on supplies, which has helped to boost margins over the years. The company can also spend huge sums on advertising.

It also helps that McDonald’s has an extensive franchise system. All in all, this reduces the need for capital.

Product Innovation. McDonald’s continues to have success with its investments. The company has gotten a lot of traction with the U.S. launch of Chicken McBites, which originated in Australia and then moved into Europe. McDonald’s is also working to improve the nutrition of its menu items. Some of the new breakfast meals have no more than 300 calories each.

Leadership. McDonald’s has a deep bench. CEO Jim Skinner, who recently retired, joined the company more than 41 years ago. The new CEO, Don Thompson, has been with McDonald’s since 1990. This kind of continuity has been a key to the company’s strength and growth.

Cons

Macroeconomy. Over the past couple months there has been a slowing of employment in the U.S., which has likely been a drag on McDonald’s, but there’s also weakness in Europe and even Asia.

Competition. The fast-food category is full of tough competitors. Some, such as Wendy’s (NASDAQ:WEN[3]), are investing more aggressively in their businesses. Wendy’s is revamping[4] its menu and upgrading its locations.

Other operators, such as Yum Brands (NYSE:YUM[5]), are ramping up the pressure in key markets such as China.

Costs. Commodity prices continue to be a problem. This is especially so with beef, which has led McDonald’s to raise prices. But higher prices could dampen demand.

Verdict

McDonald’s does face some tough challenges, such as a slowing global economy and higher costs. Yet the company is in a good position to deal with these problems.

Besides, with the recent pullback in the stock, MCD’s valuation is at a more reasonable 17 times earnings. The dividend is also at nearly 3%.

So in light of all this, the pros outweigh the cons on the stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[6], “All About Short Selling”[7] and “All About Commodities.”[8] Follow him on Twitter at @ttaulli[9] or reach him via email[10]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/03/mcdonalds.jpg
  2. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  3. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  4. revamping: //investorplace.com/2012/04/wendys-wen-stock-3-pros-3-cons/
  5. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  6. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  7. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  8. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  9. @ttaulli: https://twitter.com/ttaulli
  10. email: mailto:tom@taulli.com

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