I’m Not Giving Up on McDonald’s

by Jonathan Berr | January 25, 2013 9:58 am

McDonald’s (NYSE:MCD[1]) used to be one of those stocks that experts would advise investors to buy and forget. These days, the Oakbrook, Ill., company has been memorable for all the wrong reasons, but I’m not ready to give up on the stock, especially given its generous dividend.

Shares of the world’s largest burger chain plunged 12% in 2012 as rising commodity prices and shaky consumer confidence undermined its financial performance. In November, same-store sales, a key metric of retail performance, fell for the first time in nine years. The results since then, while better, haven’t inspired much confidence. U.S. comparable sales gained 0.3% in the quarter, which was below expectations. To make maters worse, January’s sales are expected to be negative.

Under CEO Don Thompson, who replaced the well-liked Jim Skinner last year, McDonald’s has pushed the items on its dollar menu as it tried to appeal to cash-strapped consumers coping with the worst economic downturn since the Great Depression. While that’s great for consumers, it places added pressure on the chain’s franchisees, which have seen their thin profit margins get squeezed. The road ahead for the House of Ronald looks tough.

McDonald’s is facing a slew of rivals, ranging from a resurgent Burger King (NYSE:BKW[2]) and Yum Brands (NYSE:YUM[3]) to so-called “better burger” operations such as Five Guys. McDonald’s, which has 34,000 locations around the world, has never rested in its laurels. Among its more noteworthy recent innovations is Mighty Wings, which the company is currently testing in the Chicago area. While they aren’t going cause executives at Buffalo Wild Wings (NASDAQ:BWLD[4]) any sleepless nights, they may give consumers another reason to go to McDonald’s on special occasions such as Super Bowl parties.

Thompson has other tricks up his sleeve to bring in customers, such as the Fish McBites, which will be introduced soon, new beef sandwiches, chicken entrees and beverage offers. He also has invested in the business. Last year, McDonald’s opened 1,439 new stores and redesigned about 2,400 others. The company plans to invest about $3.2 billion, more than half of which will be used to open 1,500 to 1,600 new restaurants.

“We have made the tactical adjustments that are necessary to navigate through the current environment while continuing to deliver value for the benefit of our system and our shareholders over the long term,” he said on the recent earnings conference call.[5]

McDonald’s will overcome its malaise, though it may take a while. The company has a decades-long track record of success that investors can’t ignore. It’s also got a share price that can’t be beat.

The stock trades at a price-to-earnings multiple of about 17, a discount to rivals such as Yum Brands (19) and Wendy’s (NYSE:WEN[6]; 25). The Golden Arches also offers a dividend with a yield of 3.1%, which again beats its rivals. Wall Street analysts have an average 52-week price target on the stock of $97.58, about 4.5% above where it currently trades.

For now, it doesn’t make any sense to unload my McDonald’s shares given its generous dividend and the Street’s history of underestimating the company. The stock would make a good addition to the portfolio of conservative investors. It’s not going to hit a home run, but it should be a solid long-term performer.

As of this writing, Jonathan Berr owns a McNugget-size stake in McDonald’s. Follow him on Twitter @jdberr.

  1. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  2. BKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKW
  3. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  4. BWLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BWLD
  5. on the recent earnings conference call.: http://seekingalpha.com/article/1128331-mcdonald-s-ceo-discusses-q4-2012-results-earnings-call-transcript?page=4
  6. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN

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