McDonald’s: Nothing Novel (And That’s OK!)

by Charles Sizemore | January 10, 2013 10:52 am

If McDonald’s (NYSE:MCD[1]) were a tech company, it wouldn’t be Apple (NASDAQ:AAPL[2]) or Google (NASDAQ:GOOG[3]). It would distinctly be Microsoft (Nasdaq:MSFT[4]).

Yes, I realize that I’m talking about the world’s largest chain of burger joints, and it might seem odd to mention it in the same breath as America’s top tech titans. But hear me out.

I’m an MSFT bull, but here’s the truth: Microsoft doesn’t invent anything. It takes ideas developed by others and institutionalizes them.

Think back in time. Microsoft didn’t invent the personal computer platform, the GUI-based operating system, the spreadsheet, the word processor, the web browser, email, web mail, Voice over Internet Protocol, home video game consoles or any of the other products and services it markets … yet it has a dominant position in all of them. (On a side note, I expect that Windows Phone will eventually be another success that Microsoft snipes from Apple[5]. Time will tell.)

Microsoft isn’t an inventor. It’s a very adept copier.

And this brings me back to McDonald’s.

McDonald’s invented neither the hamburger nor the fast-food concept. However, Ray Kroc & Co. built a scalable system that has come to define both in the minds of many.

And over the decades, McDonald’s has had a rare talent for adapting its menu to changing consumer tastes. The Happy Meal, Chicken McNuggets and McRibs were only the beginning. As Americans became more health-conscious, McDonald’s started selling salads for the parents to eat while the kids played on the playground. And as Americans have gone upscale in their coffee-drinking habits in recent years, McDonald’s stole a few plays from the Starbucks (NASDAQ:SBUX[6]) playbook by launching its McCafe concept.

And let’s not forget, McDonald’s was an early investor in Chipotle Mexican Grill (NYSE:CMG[7]) — a restaurant that I now cannot fathom living without.

So right now, Buffalo Wild Wings (NASDAQ:BWLD[8]) and Wingstop must be watching McDonald’s very closely. Mickey D’s recently announced that it would be expanding a test of its Mighty Wings[9] in some of its Chicago locations. If successful, McDonald’s could start selling hot wings nationwide, at least as a seasonal offering.

I’m not suggesting that McDonald’s will put either of these companies out of business any more than I would suggest that McCafe is a serious competitive threat to Starbucks. I do, however, see it as another example of McDonald’s doing what it does best: taking a concept developed elsewhere and massively scaling it — whether that’s on a temporary basis like the McRib, or as a permanent item menu.

Click to Enlarge McDonald’s share price has lagged over the last year, falling roughly 10% during a period in which the market was up by more than 10%. At 15 times expected earnings, MCD shares are not “cheap,” but neither are they particularly expensive for a company of McDonald’s quality. I would be comfortable buying McDonald’s on any significant dips.

I also should add that McDonald’s pays a respectable dividend of 3.4% and that it is a serial dividend raiser[10]. The stock’s dividend has more than doubled since 2008. Not too shabby in a world starved for quality yield.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.  As of this writing, Sizemore Capital was long MSFT. As of this writing, he did not hold a position in any of the aforementioned securities. Click here[11] to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

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