Why McDonald’s Is Worth Sticking With

by Jonathan Berr | July 23, 2012 10:37 am

McDonald’s (NYSE:MCD[1]), which has held up well throughout the Great Recession, is running out gas. But I’m not bailing on the stock.

In its latest quarterly report[2] out Monday morning, net income at the Oakbrook, Ill., company fell 4% to $1.35 billion, or $1.32 per share, versus $1.41 billion, or $1.35 per share, a year. Revenue fell to $6.91 billion, hurt by a strong dollar. The results lagged analysts’ expectations[3] of profit of $1.38 on revenue of $6.94 billion. Shares of McDonald’s, which are down 8.7% this year, traded down 3% in early Tuesday trading, in what looks to be an ugly day overall on Wall Street.

Even though it’s one of the best managed companies in the Fortune 500, the economic headwinds are knocking around the burger chain. Rising prices for corn and other commodities caused by this summer’s scorching hot weather are squeezing the profit margins of McDonald’s and other companies that are huge meat buyers.

Recent data from the U.S. Department of Agriculture[4] indicate that 40% of the nation’s corn crop is in poor or very poor condition. Last year, the figure was 11%. As corn prices rise, so will beef and chicken because the commodity is fed to cows and poultry. Analysts are also reducing forecasts[5] for red meat and poultry production.

McDonald’s results weren’t a shock. Last week, Chipotle Mexican Grill[6] (NYSE:CMG[7]) posted worse-than-expected results. It also does not bode well for other fast food and casual dining chains. These stocks are especially sensitive to changes in the economic winds. But even with McDonald’s earnings miss, there’s plenty to like about its results.

When the currency exchange hit is excluded, revenues and profit rose. Comparable sales in the U.S. rose 3.6% and 3.8% in Europe (the same place where the economy is in a tailspin). Comp sales also rose 0.9% in Asia/Pacific, Middle East and Africa, fueled by McDonald’s value menu and the popularity of premium chicken sandwiches and coffee drinks.

Those figures will decline further this year as the global economy continues to falter. Comparable sales in July are going to be positive but less than what was seen in the second quarter. McDonald’s, however, will survive these challenges, as it always does.

“Our System alignment and ongoing commitment to our global priorities of optimizing our menu, modernizing the customer experience and broadening accessibility to our brand will help us navigate the current environment as we continue to build our business and our brand,” said New CEO Don Thompson in a press release.

Wall Street hasn’t lost faith in McDonald’s, even though it has come under assault from health advocates such as the Center for Science & the Public Interest. The average 52-week price target for the stock is $100.57, above where it currently trades. Moreover, the stock appears to be cheap. It trades at a multiple of 17.33, near its five-year low of 15.19, according to Reuters.[8]

McDonald’s is a unique company. It appeals to both cash-strapped consumers through its dollar menu and to people with more money, who buy its popular coffee drinks. Plus, even the most broke consumer needs to eat out once in a while.

  1. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  2. latest quarterly report: http://phx.corporate-ir.net/phoenix.zhtml?c=97876&p=irol-newsArticle&ID=1717128&highlight=
  3. lagged analysts’ expectations: http://phx.corporate-ir.net/phoenix.zhtml?c=97876&p=irol-newsArticle&ID=1717128&highlight=
  4. U.S. Department of Agriculture: http://money.cnn.com/2012/07/18/investing/corn-prices-food-inflation/index.htm
  5. reducing forecasts: http://www.agweb.com/article/wasde_total_meat_production_forecast_reduced/
  6. Chipotle Mexican Grill: https://investorplace.com/2012/07/chipotle-stock-crash-was-overdue-cmg/
  7. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  8. according to Reuters.: http://www.reuters.com/finance/stocks/financialHighlights?symbol=MCD.N

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