Is McDonald’s Stock a Buy Now?

McDonald’s (NYSE:MCD) most recent quarterly earnings release failed to impress investors with the share price dropping about 3% to around $88 and change in response. Although total revenue rose slightly year over year from $6.91 billion to $6.92 billion, earnings disappointed.   For Q2 2012 net income dropped 4.5%t to $1.35 billion, or $1.32 a share.  The year ago numbers were $1.42 billion in net income, or $1.35 per share.

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The share price has since recovered somewhat, closing on September 24th 2012 at $93.71, with the recent announcement of a 10% increase in dividend providing a big boost.  Considering the company’s global reach and history of solid dividend payments, is it time to BUY MCD or should investors STAY AWAY or adopt a WAIT and SEE stance?

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

C = Catalyst for the Stock’s Movement

The dividend increase may yet prove to provide a catalyst for MCD’s share price should the recent warnings from Dow Jones Transportation bellwether Federal Express (NYSE:FDX) and Dow Jones Industrial kingpin Caterpillar (NYSE:CAT) about weakening economic conditions drive more investors to seek refuge with proven dividend payers with less risk.  McDonalds has increased its dividend every year for the past 36 years.

McDonalds derived 40% of its revenue from European operations in 2011 and any improvement in economic conditions there could act as an additional catalyst for the share price.

H = High Quality Pipeline

Younger investors may be unaware that it was McDonalds that ushered in the brilliant strategy of breakfast fast food with the introduction of the game-changing Egg McMuffin back in the 1970’s.  The company has done an outstanding job of developing products to meet consumer demand from the introduction of healthier offerings to the McCafe line of beverages.  On the international front, MCD customizes menu offerings to local tastes with products like McBaguettes in France, and McArabia pita-style sandwiches throughout the Middle East.  Recently, MCD announced the opening of vegetarian only stores in India.

E = Equity to Debt Ratio is Close to Zero

Is McDonald’s debt to equity ratio of .97 with total debt of $13.6 billion and $2.5 billion total cash on hand a major cause for concern?  At some level debt is necessary for growth but the question is how much is safe.  To put McDonald’s debt position into perspective let’s look at their closet global competitor – Yum Brands (NYSE:YUM).  Although YUM offers different products, they are also a fast food operator with global exposure.  YUM’s debt to equity is 1.55, with $3.3 billion in debt and $989 million total cash.

A = A Level Management Runs the Company

In mid-summer 2012 the company’s CEO Jim Skinner retired after 33 years with the company and 8 as its CEO.  While some might see that as a possible cloud on the horizon, others view the fact his replacement, Don Johnson, shows the company’s overall management strength since Johnson also rose through the company ranks, with 22 years with the company.  Truly great companies do not need to go to the outside for new leadership as talent development is a core operating principle of the company. 

T = Technicals on the Stock Chart are Strong

As of September 24th 2012 the stock price is 3.32% above its 20 Day Simple Moving Average; 4.83% above the 50 Day SMA; and 0.79% above the 200 Day SMA.  If you believe in the RSI (Relative Strength Index) as a good indicator, MCD is above 90, indicating the possibility the stock is currently overbought and due for a fall.  Year over year the share price is up 34.62% and year to date it is up 17.21%

S = Support is Provided by Institutional Investors & Company Insiders

MCD is 66.32% institutionally owned.  The top five holders are Fidelity Investments, Vanguard Group,BlackRock Institutional Trust, Northern Trust, and Bank of America.  In the past six months insiders have sold 675 thousand shares.

E = Earnings Are Increasing Quarter over Quarter

Quarter over quarter earnings per share dropped 2.26%. On an annual basis, EPS has increased every year for the last five years, with total growth for the period at 18.33%.

E = Excellent Relative Performance to Peers

MCD is battling rival YUM for international dominance and so far is losing the battle in China.  As of June 2012 Yum had over 4,000 fast food outlets in China compared to 1,400 for McDonalds.  YUM”s Return on Equity of 77.58% is twice that of MCD at 37.93%.

T = Trends Support the Industry in which the Company Operates

As more and more emerging market countries experience rising middle class populations, the long term trend for branded Western fast food operators looks attractive. 

Conclusion

For income investors with a longer term horizon, it is hard to see MCD as anything but a BUY.  For others, the recessionary environment across Europe and economic uncertainty globally suggests a WAIT and SEE attitude for a better entry point.  The softness in growth from industry heavy weights like McDonalds, Yum Brands, and Chipolte suggests that entry point is coming.

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