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.
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Microsoft doesn’t invent anything. (I say this as a Microsoft bull, by the way.) 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, e-mail, web mail, voice-over-internet telephony, home video game consoles any of the other products and services it markets, yet it has a dominant position in all of them.
Microsoft isn’t an inventor. It’s a very adept copier and institutionalizer of ideas invented by others. (On a side note, I expect that Windows Phone will eventually be another success that Microsoft snipes from Apple. Time will tell; for now Windows Phone is off to a modest start.)
This brings me back to McDonalds. McDonalds invented neither the hamburger nor the fast food concept. (Their burgers are barely edible, in my opinion.)
But Ray Kroc & Co. built a scalable system that has come to define both in the minds of many. And over the decades, McDonalds 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, McDonalds started selling salads for the parents to eat while the kids played on the playground. And as Americans have gone upscale in the coffee drinking habits in recent years, McDonalds stole a few plays from the Starbucks (Nasdaq:$SBUX) playbook by launching its McCafe concept.
And let’s not forget, McDonalds was an early investor in Chipotle Mexican Grill (NYSE:$CMG)—a restaurant that I now cannot fathom living without.
Right now, Buffalo Wild Wings (Nasdaq:$BWLD) and Wingstop must be watching McDonalds very closely. Micky D’s recently announced that it would be expanding a test of its Mighty Wings in some of its Chicago locations. If successful, McDonalds could start selling hot wings nationwide, at least as a seasonal offering.
I’m not suggesting that McDonalds 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 McDonalds doing what it does best: taking a concept developed elsewhere and massively scaling it.
McDonalds share price has lagged over the last year, falling roughly 10% over a period in which the market was up by more than 10%. At 15 times expected earnings, McDonalds shares are not “cheap,” but neither are they particularly expensive for a company of McDonald’s quality. I would be comfortable buying McDonalds on any significant dips.
I should also add that McDonalds pays a respectable dividend of 3.4% and that it is a serial dividend raiser. The stock’s dividend has more than doubled since 2008. Not too shabby in a world starved for quality yield.
Disclosures: Sizemore Capital is long MSFT.
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