Is McDonald’s Ready for a Super-Sized 2013?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

The golden arches lost some of their luster in 2012 as McDonald’s (NYSE:MCD) lagged behind the market by 25 percent. Recently though, it seems like McDonald’s is regaining some traction. After disappointing sales numbers in January, February, and April, McDonald’s announced a 2.6 percent increase in same-store sales, beating out analyst expectations. Will McDonald’s positive momentum continue throughout the year or will competitors YUM! Brands (NYSE:YUM), Burger King (NYSE:BKW), and Wendy’s (NASDAQ:WEN) catch up (no pun intended)? Let’s use our CHEAT SHEET analysis to examine McDonald’s current position in the marketplace.

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Catalysts

McDonald’s same-store sales took off in May, increasing 2.6 percent. This rise in sales came after disappointing sales numbers in January, February, and April. How did the sales growth occur after four straight months of declining same-store sales? A combination of innovation and aggressive marketing tactics helped McDonald’s get sales back on track.

McDonald’s currently has 140 items on its menus worldwide and 160 new offerings in the pipeline. To tackle the decline, management introduced several new products to the menu including chicken McWraps and the Egg White Delight sandwich. These products fared well with consumers and addressed growing concerns that McDonald’s was planning on discontinuing some of its healthier menu items.

Additionally, McDonald’s has focused on more direct marketing tactics, stressing its value to consumers. The fast food industry has taken a hit recently. Consumers have been eating out less due to economic uncertainty and decreases in their income through higher payroll tax rates. Going forward, McDonald’s has shifted its focus toward offering nutritional and low-priced items to consumers who are becoming increasingly conscious about their health and their budgets.

Fundamentals

When deciding whether to invest in McDonald’s, it is a useful exercise to look at its chief competitors, Burger King, Wendy’s, and Yum! Brands. For those unfamiliar with Yum! Brands, the company owns Pizza Hut, KFC, Taco Bell and WingStreet restaurants.

No disrespect to Burger King, but McDonald’s earns the title of ‘king’ when comparing dividend yields across the group. McDonald’s yields an attractive 3.1 percent, the highest of the fast-food chains, and higher than the restaurant industry average of 2.5 percent. McDonald’s most recent five-year dividend growth rate was also very good at 15.3 percent. McDonald’s currently pays out 55 percent of its retained earnings to investors, which suggests that the company has the capacity to increase dividends in the future.

With a trailing price to earnings ratio of 18.52, McDonald’s looks relatively cheap compared to the restaurant industry. However, we must be careful when interpreting this number. McDonald’s and with Yum! Brands have riskier business operations than companies like Burger King and Wendy’s due to their significant exposure to emerging markets. The higher price to earnings ratio of Burger King and the restaurant industry as a whole may be a result of investors being willing to pay more for the lower risk.

McDonald’s growth estimate for 2013 is a modest 6.3 percent. This number doesn’t look so bad sitting next to Yum! Brands’ projected -5.5 percent nosedive over the coming year. Both companies have big plans for overseas expansion, especially in China, but their sales have slid due to recent avian flu fears. The current decline in Chinese sales has not deterred McDonald’s from aggressive expansion. McDonald’s has plans to hire up to 75,000 workers in China this year and recently debuted a new menu containing rice offerings for Chinese consumers.

MCD BKW YUM WED Industry
Trailing P/E 18.52 53.82 22.99 N/A 22.2
Growth Est. (2013) 6.3% 15.9% -5.5% 20.0% N/A
Dividend Yield 3.1% 1.2% 1.9% 2.7% 2.5%

Technicals 

McDonald’s is currently trading at $99.75, slightly below its 50-day moving average of $100.07, but above its 200-day moving average of $96.27. We can see that McDonald’s has experienced a longer-term uptrend since it is trading above its 200-day moving average. The share price has been more volatile over the last few months, with a high of 103.70 and a low of $96.42. Investors should watch closely to see if the stock can break through its 50-day moving average—a good sign that investor sentiment is positive.

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Conclusion

After a disappointing 2012, McDonald’s looks like is has regained its footing in the marketplace. The company’s renewed focus on innovative menu items and value-based marketing strategies should bolster same-store sales over the coming months. It remains to be seen whether these efforts will produce long-term success for McDonald’s; it is a challenging time for fast-food restaurants. Still, McDonald’s offers an attractive dividend—the best of the fast food giants. McDonald’s also looks poised to capitalize on the emerging Chinese market.  Though Yum! Brands is an increasingly worthy competitor, McDonald’s has the resources and the management experience to establish a strong presence in China.

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If you are looking to diversify your portfolio with a high-dividend, large-cap stock, McDonald’s may be a buy. McDonald’s seems to have regained its innovative touch, though its new strategies are largely untested; the company has only seen increases in same-store sales once this year. Additionally, the outlook for the restaurant industry remains bleak. McDonald’s may be getting back on track, but for now investors should WAIT AND SEE.

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