MCDONALD’S CORP. $88 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.0 billion; Market cap: $88.0 billion; Price-to-sales ratio: 3.3; Dividend yield: 3.2%; TSINetwork Rating: Above Average) is the world’s largest fast-food company by sales. Its 33,735 restaurants in 119 countries serve a wide variety of foods, but they are best known for their hamburgers and french fries.
The stock is down 12% since the start of 2012, mainly due to concerns about the company’s exposure to the slowing European economy.
Europe accounts for 42% of McDonald’s sales and 38% of its earnings. The company’s other divisions include the U.S. (34% of sales, 45% of earnings), and Asia (24%, 17%).
In the three months ended June 30, 2012, sales rose just 0.2%, to $6.92 billion from $6.91 billion a year earlier. However, if you exclude the negative impact of foreign exchange rates, sales would have increased by 5%.
Overall same-store sales rose 3.7% in the quarter. In Europe, same-store sales rose 3.8%, due to strong demand for lower-priced menu items. U.S. same-store sales gained 3.6% as the company launched new McCafe coffees and fruit smoothies. Same-store sales rose 0.9% in Asia; gains in China and Australia offset weaker sales in Japan.
Earnings fell 4.5%, to $1.3 billion from $1.4 billion a year ago. McDonald’s spent $856.2 million on share buybacks in the quarter. Because of fewer shares outstanding, earnings per share fell 2.2%, to $1.32 from $1.35. Unfavourable exchange rates also held back earnings: on a constant-currency basis, earnings per share would have risen 3.0%.
In 2012, McDonald’s plans to open 1,300 new restaurants and renovate 2,400 existing outlets. In all, it expects to spend $2.9 billion on these projects.
The company’s strong balance sheet will continue to support its expansion plans: its long-term debt of $12.1 billion is a low 14% of its market cap, and it holds cash of $2.3 billion, or $2.25 a share.
McDonald’s and other fast-food chains face rising ingredient costs, particularly in the wake of this summer’s drought conditions in North America, which will likely lead to lower harvests in 2012.
However, the company’s strong brand and high market share should help it pass along these extra costs to its customers.
The stock trades at 15.9 times the company’s likely 2012 earnings of $5.55 a share. The $2.80 dividend yields 3.2%.
McDonald’s is a buy.
