by Tom Taulli | July 23, 2012 11:59 am
This morning, McDonald’s (NYSE:MCD) announced a disappointing second-quarter earnings report. Profits dropped by 4.5% to $1.35 billion, or $1.32 a share. The Wall Street consensus was for $1.38 a share. Revenues were also light, coming to $6.92 billion, which was below analysts’ forecast of $6.96 billion. On the news, McDonald’s stock is down about 2.5% in today’s trading.
This year has certainly been unusually tough for the fast-food giant, with the stock down by about 7%. Keep in mind that the average annual return for the last three years was a sizzling 19%.
So can McDonald’s get back on track? Or should investors stay away? To see, let’s take a look at the pros and cons:
Global Scale. Each day, McDonald’s 33,500 restaurants serve about 67 million people across 119 countries. Its menu items include iconic brands like the Big Mac, Chicken McNuggets and Quarter Pounder.
McDonald’s global scale gives it tremendous advantage in terms of getting lower costs from suppliers. It has also has huge sums available for marketing.
Growth Potential. It seems like McDonald’s is everywhere. Yet the opportunity for growth is still strong. Consider that McDonald’s addressable global market is $420 billion — and its share of that is now about 14%. More important, the market is likely to expand, especially in emerging economies where the middle classes are expected to grow over the long haul.
Dividends. The current yield is an attractive 3.1%. In light of McDonald’s strong cash flows and modest debt levels, the distribution is fairly safe.
Macroeconomy. Over the past few months, the global economy has been slowing down, and it has been taking a toll on McDonald’s. In the second quarter, the overall same-store sales came to 3.7%, which was down from 7.3% in the first quarter.
Competition. McDonald’s is in a highly competitive industry. For example, Yum Brands (NYSE:YUM) is putting pressure on key markets in China. Even Wendy’s (NASDAQ:WEN) is becoming a factor as it has been upgrading its locations and improving its menu.
Commodities. The horrendous drought in the U.S. is becoming a problem for McDonald’s. With surging corn prices, higher meat and chicken costs are sure to follow (because of corn’s use as feed). So, that could pinch McDonald’s margins.
For the past nine years, McDonald’s has put in motion its “Plan to Win.” It has five key drivers: people, products, place, price and promotion. All of these factors have been key in focusing on building a better brand. And yes, this has translated into strong growth.
Looking at the long haul, this strategy should continue produce good returns for investors. And with the recent drop in McDonald’s stock price, the valuation is certainly more attractive. The forward price-to-earnings ratio is a reasonable 14x.
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 is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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