Is McDonald’s Tastier Than Burger King and Wendy’s?

With shares of McDonald’s Corp. (NYSE:MCD) trading at around $101.72, is MCD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

For those who haven’t already heard, Technomic recently conducted a survey on Informal Eating Out establishments, including McDonald’s, Burger King Worldwide (NYSE:BKW), and The Wendy’s Company (NYSE:WEN). Below are the results:

Food Quality

1st Place: Wendy’s

2nd Place: Burger King

3rd Place: McDonald’s

Taste & Flavor

1st Place: Wendy’s

2nd Place: Burger King

3rd Place: McDonald’s

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You don’t have to be a statistician to see a pattern forming here. However, the irony is that McDonald’s dominates when it comes to running a business, and it has been the best investment of the three throughout the years. In addition to the most impressive stock appreciation, McDonald’s also offers the highest yield. McDonald’s currently yields 3 percent whereas Burger King yields 1.30 percent and Wendy’s yields 2.60 percent.

McDonald’s is an exceptional performer when it comes to branding. It’s the fourth most valuable brand in the world behind IBM (NYSE:IBM) (3rd), Google (NASDAQ:GOOG) (2nd), and Apple (NASDAQ:AAPL) (1st).

This doesn’t mean that McDonald’s is free of problems. It has too many menu items – 145 items to be exact. McDonald’s better not sign up for an episode of Kitchen Nightmares. Chef Ramsay would tear the place apart. Having this many menu items has also led to slower food service. Considering many diners look at McDonald’s as a fast food establishment – regardless of what McDonald’s wants to call itself – this is a big negative. That said, it’s an easy problem to fix since many of the menu items are repetitive. Thankfully, McDonald’s is reworking the menu. It’s also going through a store reimaging process. This will lead to increased near-term costs, but it should also lead to increased market share over the long haul.

Now let’s get to some numbers. Below is a chart comparing fundamentals for McDonald’s, Burger King, and Wendy’s.

MCD BKW WEN
Trailing P/E 18.97 48.49 N/A
Forward P/E 16.39 20.78 26.65
Profit Margin 19.79% 8.07% -0.12%
ROE 36.59% 12.07% -0.23%
Operating Cash Flow 7.02B 250.20M 238.16M
Dividend Yield 3.00% 1.30% 2.60%
Short Position 1.10% 12.00% 9.40%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

McDonald’s has been a steady winner over the past three years. This should come as no surprise.

1 Month Year-To-Date 1 Year 3 Year
MCD 2.23% 16.74% 15.63% 65.21%
BKW 3.35% 15.30% -0.53% -0.53%
WEN 13.33% 31.16% 37.56% 50.21%

At $101.72, McDonald’s is trading above its averages.

50-Day SMA 101.28
200-Day SMA 94.50
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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for McDonald’s is close to the industry average of 0.90. Debt management has been good over the years, but there are now concerns about increased debt ratios due to consistent buybacks.

Debt-To-Equity Cash Long-Term Debt
MCD 0.84 1.87B 12.80B
BKW 2.55 598.80M 3.05B
WEN 0.74 428.68M 1.46B

E = Earnings Are Steady

Earnings and revenue have steadily increased on an annual basis. However, the pace has slowed.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 23,522 22,745 24,075 27,006 27,567
Diluted EPS ($) 3.76 4.11 4.58 5.27 5.36

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings. That said, both revenue and earnings declined on a sequential basis.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 6,546.60 6,915.90 7,152.40 6,952.10 6,605.30
Diluted EPS ($) 1.23 1.32 1.43 1.38 1.26

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

McDonald’s is one of the strongest brands in the world. For that reason alone, it would be unwise to bet against McDonald’s. This doesn’t mean a long position should be initiated. It simply means that shoring the stock would be extremely risky.

In addition to having one of the strongest brands in the world, margins are solid and cash flow is good. Furthermore, annual earnings have steadily improved. And let’s not forget about that three percent yield.

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Slowing revenue growth is a concern, but McDonald’s has had its ups and downs through the years. As long as it continues to be well-managed, it should be a long-term winner thanks to the brand. It should also be noted that McDonald’s is resilient in bear markets.

McDonald’s is still an OUTPERFORM.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t own any positions in this stock.