Articles for McDonald’s

Has McDonalds Become Too Pricey To Buy or Hold?

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Thursday, February 2nd, 2012 by Trefis Team

We are strong believers in making buy, sell or hold investing decisions predicated on the fundamentals behind the business that the common stock represents. On the other hand, we also acknowledge the undeniable reality that “Mr. Market” does not always price a company according to its intrinsic value based on earnings and cash flows. However, we would further argue that “Mr. Market’s” shenanigans are more apt to apply over the shorter run than they are the over the longer run. To summarize, earnings determine market price in the long run, but investor psychology can play havoc with sound fundamental values over shorter periods of time.

With this article we’re going to take an in-depth look at McDonalds Corp. (MCD) based on its fundamental value by the numbers. There are two primary reasons for writing this particular article at this particular time, both of which were instigated by reader comments and suggestions. First of all, we’ve seen a running debate regarding whether McDonalds (MCD) is fairly valued or overvalued at today’s valuation levels. Second, we’ve been challenged to write articles that were depicting full value or overvaluation because we have typically only written articles on undervalued selections. We believe that because McDonalds had such a strong run in calendar year 2011, that many people believe that it now must be overvalued after rising so much.

McDonald’s Shows Impressive Growth as Foreign Investments Pay Off

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Tuesday, January 31st, 2012 by Trefis Team

McDonald’s (NYSE:MCD) released its Q4 earnings last week and delivered strong results, justifying the company’s 30% stock return in the year 2011. McDonald’s total revenues increased to $6.82 billion, up 10% from the same quarter last year. As expected, the APMEA (Asia-Pacific, Middle East and Africa) region led the pack in terms of revenue growth, and the company’s increased focus on East Europe seemed to have paid off, as it delivered strong revenue growth in the region despite the debt crisis.

McDonald’s net income rose to $1.38 billion, which represents a 10.8% increase from Q4 2010. It’s encouraging to see that there was no single division that showed weakness, and the company was able to increase revenues as well as profits. The company competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), Chipotle Mexican Grill (NYSE:CMG), among many others.

We have a Trefis price estimate of $95 for McDonald’s, which is around 3% below the current market price. We are in the process of revising our estimates to incorporate Q4 earnings.

McDonald’s Big Growth Plans Could Bite Into Profits

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Monday, January 23rd, 2012 by Trefis Team

After a stellar 2011 in which McDonald’s (NYSE:MCD) stock gained more than 30%, we think the company’s current stock price is more reflective of its long term, intrinsic value and leaves little room for improvement in the near term. In fact, the sound fundamentals of the company might have fueled optimism and recent climb in shares. Skeptics who thought the company would struggle due to a potential recession were proved wrong as several restaurant stocks like Yum! Brands (NYSE:YUM), Starbucks (NASDAQ:SBUX) and Chipotle Mexican Grill (NYSE:CMG) all significantly outperformed the broader indices. However, there are certain factors like the cost of the McDonald’s expansion that need to be accounted for and can potentially stymie growth in the medium term.

We have a $95 price estimate for McDonald’s, which is about 5% lower than the current market price. Read More »

McDonald’s Q4 Preview: Global Growth in Focus Next Week

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Thursday, January 19th, 2012 by Trefis Team

McDonald’s (NYSE:MCD) will announce its Q4 2011 results on the 24th. After a strong Q3 performance, we expect the trend to continue in the last quarter of 2011 backed by impressive global comp sales in the months of October and November. The stock had a stellar 2011 and rose by more than 10% last quarter. McDonald’s competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), among many others. Below are a couple of interesting trends emerging not only in Q4 but also in the coming years.

See our complete analysis for MCD stock here

Strong Revenue Growth

Revenues will increase for a number of reasons, the most important being McDonald’s on-going expansion across Asia and East Europe. The company is investing more than $500 million in the coming years to open new restaurants in these regions. Attracting new customers is not a problem as McDonald’s enjoys strong brand recognition and is, in fact, considered a novelty in some of these places.

Higher commodity prices will increase costs, which the company will most likely pass on to the customers. However, McDonald’s has played its card smartly so far and the price increases have largely gone unnoticed. The company is also extending its McCafe brand to more restaurants. Last year, it announced its plan to extend the brand to another 500 restaurants in Canada. The McCafe line of restaurants often have higher revenues associated with them.

Lower Profitability

Note that this is not necessarily bad. McDonald’s restaurants worldwide are either company-owned or franchised. For a company-owned restaurant, the entire revenues generated are added to the income statement whereas, for a franchised restaurant, only a fraction of the revenues (typically a % of sales) are added.

McDonald’s main growth driver has been the APEMA (Asia-Pacific, Middle East and Africa) region, where the proportion of sales from company-owned restaurants is higher.

Since entire revenues are added to the income statement, it is natural for company-owned restaurants to have a lower EBITDA margin, whereas franchisee restaurants earn EBITDA margins of more than 80%.

In developing countries, it makes sense to operate company-owned restaurants since legal, infrastructural and quality issues combined with a lack of transparency often inhibit operation of franchisee restaurants. So, we expect a high proportion of new restaurants opening in these countries to be company-owned. Hence, this will ensure strong revenue growth for the company. (E.g. when the sales of a company-owned restaurant increases from $400 million to $500 million, incremental revenue on the income statement is $100 million. Now, for a franchisee restaurant, suppose McDonald’s cut is 10% of sales then incremental revenue on income statement is $10 million (10% of $100 million)).

So, along with strong revenue growth, we expect a decrease in overall profitability. However, this is not necessarily bad since the absolute value of profit will still increase. At the same time, strong revenue growth can be a bit misleading as you tend to overvalue the stock.

We have a $95 price estimate for McDonald’s, which is about 5% lower than the market price.

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McDonald’s Plans for Expansion Across Eastern Europe and Russia

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Wednesday, January 4th, 2012 by Trefis Team

McDonald’s (NYSE:MCD) seems to be everywhere yet there are a few places where the company is not dominant — and Russia and Eastern Europe are among them. The fast-food chain, which has 33,000 restaurants around the world, has major expansion plans lined up for this region. The Eastern European and Russian markets are lucrative for the company as these countries fall in the medium-to-high income groups and penetration is still low. McDonald’s has had a stellar year and its stock price returned more than 30%, outperforming the broader market indices significantly. McDonald’s currently competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), among many others.

Asian Expansion Helps McDonald’s Stock Reach New Highs

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Monday, December 26th, 2011 by Trefis Team

McDonald’s (NYSE:MCD) shares continue to move higher as the stock touched $100 for the first time on Friday. The company’s stock has returned more than 30% this year in party due to its Asian expansion, which is performing exceptionally well. The company’s comparable sales for Asia/Pacific, Middle East and Africa division grew by 8.1% last month. This can be attributed to McDonald’s ability to dynamically change itself to cater to the needs of local consumers while keeping prices affordable at the same time. McDonald’s currently competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), among many others.

Customers Lovin’ the Free Bytes at McDonald’s

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Friday, December 23rd, 2011 by Trefis Team

It looks like McDonald’s (NYSE:MCD) move to introduce Wi-Fi is paying off, especially in the UK, as more customers are using the company’s free service. According to the company, 750,000 customers now use its Wi-Fi across the UK. Customers are now downloading a staggering 500 GB of data each day, double of what it was a year ago. With McDonald’s ubiquity and Internet now a quintessential part of people’s lives, we estimate that the number of customers as well as the Average Spend per User (ASU) to go up as people will stay longer at McDonald’s with Internet access. McDonald’s currently competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), among many others.

Golden Arches Return 30% YTD, More Difficult Next Year

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Thursday, December 22nd, 2011 by Trefis Team

McDonald’s (NYSE:MCD) has climbed around 30% this year from $72 at the start of the year to the current market price of $98. The company announced its global comparable sales, which were higher than expected sending the shares higher. However, we believe that repeating this growth will be difficult as McDonald’s pushes further ahead in emerging markets that are grappling with inflationary pressures that could weigh on both profit margins and sales for the golden arches. McDonald’s currently competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), among many others.

McDonald’s, Starbucks Jump on Board Chipotle’s Green Machine

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Friday, December 16th, 2011 by Trefis Team

Restaurant chains like Chipotle (NYSE:CMG), McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) are trying to be more green to win the hearts and minds of customers by sourcing natural ingredients and promoting recyclability. Such moves will increasingly have a greater impact going forward as the regulations are bound to get tougher. Moreover, these restaurants are likely to get future tax benefits as well. While these moves are unlikely to save on costs in the near term, they could pay off longer term as the input costs have soared for many restaurants. More importantly, an improved image in the eyes of the customers could be the ultimate pay off.

McDonald’s Rolls the Dice on Installing TVs at Restaurants

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Tuesday, December 6th, 2011 by Trefis Team

If you want other reason to go to McDonald’s (NYSE:MCD) and hang out a while you could soon there to watch the tube. McDonald’s has long been associated with its value oriented image and made recent attempts to upgrade stores to improve this image as well as offer premium foods, which calls in to question the rationale behind giving people a reason to veg out and watch TV at restaurants. The thinking is that this will lead to better sales and could attract people to stick around and spend more. The in-store TV channel, known as McTV, is part of $2.9 billion that the company aims to spend in 2012 as part of its capital expenditure. McDonald’s currently competes with Yum! Brands, Subway, Wendy’s (NYSE:WEN), among many others.