Is McDonald’s Still a Safe Investment?

With shares of McDonald’s Corp. (NYSE:MCD) trading at around $100.63, 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

McDonald’s has been given an OUTPERFORM rating here several times over the past four months. The stock has performed well over that time frame. However, has the situation changed? Will this rating be different? That can’t be revealed just yet, but the following list is a hint:

  • Enormous operating margin expansion over the past five years
  • Exceptional historical stock performance
  • Exceptional brand
  • International growth potential
  • 3.10 percent yield
  • Consistent top-line growth
  • Consistent bottom-line growth
  • Top-tier management
  • Stock is a favorite of analysts (this does help)

Other than poor industry trends due to a weakening consumer, the only negative is a decline in same-store sales. However, that decline in same-store sales last month was less than anticipated. The decline was 1.5 percent opposed to an expected decline of 3.0 percent.

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The chart below compares current fundamentals for McDonald’s, Burger King Worldwide (BKW), and Yum! Brands (NYSE:YUM). McDonald’s has a market cap of 100.56 billion, Burger King has a market cap of 6.62 billion, and Yum! Brands has a market cap of $30.51 billion.

MCD

BKW

YUM

Trailing   P/E

18.71

57.29

20.03

Forward   P/E

15.82

20.77

17.67

Profit   Margin

19.82%

5.99%

11.71%

ROE

36.82%

10.58%

76.06%

Operating   Cash Flow

$6.97 Billion

$224.40 Million

$2.29 Billion

Dividend   Yield

3.10%

1.00%

1.90%

Short   Position

1.30%

N/A

2.20%

 

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

E = Equity to Debt Ratio Is Normal    

The debt-to-equity ratio for McDonald’s is very close to the industry average of 0.90. It’s also stronger than the debt-to-equity ratios for Burger King and Yum! Brands.

Debt-To-Equity

Cash

Long-Term Debt

MCD

0.89

$2.34 Billion

$13.63 Billion

BKW

2.60

$546.70 Million

$3.05 Billion

YUM

1.27

$776.00 Million

$2.94 Billion

 

T = Technicals on the Stock Chart Are Strong  

McDonald’s has outperformed Burger King and Yum! Brands year-to-date. It also offers the highest yield (see chart in Catalyst section).

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1 Month

Year-To-Date

1 Year

3 Year

MCD

5.85%

15.00%

6.65%

63.42%

BKW

4.31%

14.53%

N/A

N/A

YUM

3.47%

2.55%

-1.46%

83.36%

 

At $100.63, McDonald’s is trading above all its averages.

50-Day   SMA

96.36

100-Day   SMA

92.24

200-Day   SMA

91.09

 

E = Earnings Have Been Impressive                  

Revenue and earnings have consistently improved on an annual basis. This should come as no surprise to those familiar with McDonald’s from an investing standpoint.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

23.52

22.74

24.07

27.01

27.57

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 improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

6.82

6.55

6.92

7.15

6.95

Diluted   EPS ($)

1.32

1.23

1.32

1.43

1.38

 

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?

T = Trends Might Support the Industry

The consumer continues to weaken, and competition has increased. However, McDonald’s continues to find ways to grow.

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Conclusion

In addition to all the positives mentioned in the Catalyst section, McDonald’s is incredibly resilient. It’s one of the few stocks throughout the broader market that was unfazed during the financial crisis of 2008/2009. That is very comforting. However, the stock isn’t invincible, as we saw in the early 2000s. Those who got in at that time took advantage of an incredible opportunity. The opportunity is nowhere near as good now, but McDonald’s has still proven time and time again that it will always find a reason to climb higher. The 3.10 percent yield is also a big selling point.

McDonald’s is an OUTPERFORM.

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