What’s to worry about McDonald’s (NYSE:MCD)? Plenty, if you think the protracted European financial mess, combined with high U.S. unemployment and fierce competition will scuttle, or at least slow down, sales at the world’s leading quick-service restaurant chain.
However, if you go by McDonald’s track record for pursuing profits and global growth, you’ll buy more shares on the rare occasions when the stock slides back. And here’s something new and novel in McDonald’s strategy: It has started to target the more affluent customers, too, with expanded menus to suit their taste and pocketbook.
But what’s happening with McDonald’s stock is this: Its steady rise over the years and hitting record highs along the way has caused some investors to develop acrophobia, fearful that the stock could only tumble after ascending to such lofty heights. The share price steadily rose from $72 on March 14, 2011, to an all-time high of $102.22 just last week, on Jan. 19. It pulled back some on Jan. 24, to $98 and closed at $99 on Jan. 26.
But investors should take heart — and perhaps look to Apple (NASDAQ:AAPL) for inspiration. Shares of the maker of the iPod, iPhone and iPad have steadily gone up year over year, powered by the company’s innovative and useful devices. Then on Jan. 25, Apple stock exploded on the upside and left the rest of the tech sector in the dust. What drove up the stock by as much as 26 points that day was Apple’s doubling of its earnings in the most recent quarter — just when even Wall Street was ready to give up on the stock.
Of course, it can be argued that Apple is in a completely different business, being a technology whiz versus and McDonald’s supposedly mature food and restaurant outfit. But one day it will be said that McDonald’s is the Apple of the fast-food industry. You can’t minimize the company’s solid sales and earnings growth, innovative sense in its menus and pricing strategy, and its extensive footprint in the global markets, including Europe, the emerging markets and most definitely, China.
What’s striking is that even analysts who have trimmed their sales and earnings estimates — because of worry about headwinds from Europe and rising commodity prices — refuse to abandon Mickey D. They continue to recommend the stock and aren’t reducing their price targets.
“The strong top line [revenue] outweighs the modest cost headwinds,” argues Lynne Collier, analyst at investment bank Sterne Agee. So she’s maintaining her buy rating and, at the same time, raising her 12-month price target to $109 a share from $106. The analyst notes that “McDonald’s posted impressive fourth-quarter results as global same-store sales remained strong despite macroeconomic challenges.”
Jim Yin, analyst at Standard & Poor’s, says McDonald’s is gaining market share even in this challenging economic times with its value offerings. He also sees incremental growth from the company’s expanding menu items that target the more affluent customers, and from its ongoing modernization efforts.
Yin says that because of his concern over a possible European economic slowdown and lower margins due to the rise in commodity prices, he has trimmed his earnings estimate for 2012 by six cents a share, to $5.72. For 2011, he figures the company earned an estimated $5.23 a share, up from 2010’s $4.58. But he’s staying with his 12-month price target of $109 a share.
So the play on McDonald’s is one for the long haul, taking advantage of price pushbacks and sticking with it for that Apple-like blastoff moment.
