MCDONALD’S CORP. $61 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.1 billion; Market cap: $67.1 billion; WSSF Rating: Above average) operates over 31,400 fast food restaurants in 118 countries. Much of McDonald’s recent growth comes from its overseas operations, which provide two-thirds of its sales and half of its earnings. That’s mainly because growing prosperity is making the company’s products more affordable in developing countries. The higher value of most foreign currencies compared with the U.S. dollar has also expanded the contribution from McDonald’s international operations. The company also continues to enjoy the benefits from a major overhaul of its operations in 2002. This included slowing the growth of new stores. Instead, it focused on re-modeling older stores to encourage repeat visits. It also added healthier foods such as salads to its menu, to appeal to health-conscious consumers who usually avoid fast food. McDonald’s also sold its investments in several casual dining chains. Thanks to these initiatives, earnings jumped from $1.43 a share (total $1.8 billion) in 2003 to $2.91 a share ($3.5 billion) in 2007. If you disregard nonrecurring items, McDonald’s would have earned $2.99 a share in 2007. Sales grew 33.3%, from $17.1 billion in 2003 to $22.8 billion in 2007.
More franchisees cuts risk
McDonald’s continues to sell more of its company-owned locations to franchisees. It now owns 20% of its outlets, while franchisees and affiliates operate the remaining 80%. Increasing franchisee ownership lets McDonald’s collect more rent and other fees. As well, franchisees assume the costs of upgrades and maintenance. They can also quickly adjust their menus and promotions to suit local tastes. In the three months ended June 30, 2008, Mc- Donald’s earned $1.04 a share (total $1.2 billion), compared with a loss of $0.59 a share ($708.4 million) a year earlier. If you disregard unusual items in both quarters, earnings per share grew 30.6%, to $0.94 from $0.72. Revenue rose 4.0%, to $6.1 billion from $5.8 billion. Overall same-store sales rose 6.1% in the second quarter. In the U.S., same-store sales rose 3.4%, due to strong demand for new breakfast items. Same-store sales rose 7.4% in Europe, and 8.8% in Asia. McDonald’s will likely generate cash flow of roughly $5.4 billion or $4.65 a share in 2008. That should let it continue to buy back its shares. In the first half of 2008, it spent $2.8 billion on share repurchases. McDonald’s strong cash flow also gives it plenty of room to increase its $1.50 dividend, which yields 2.5%. The stock now trades at a reasonable 17.3 times its likely 2008 earnings of $3.53 a share. McDonald’s is a buy.
