The restaurant business is known for competition and generally tracking the broader economy. In fact, McDonald's Corporation (NYSE:MCD) is largely viewed as a bellwether of macro trends. To get the most out of restaurant stocks, I recommend looking carefully at corporate trends and whether the current price justifies an investment. Reasonable multiples can be gauged through making public equity comparisons and present value analyses. Below, I use these valuation methods in my assessment of McDonald's and The Wendy's Company (NASDAQ:WEN).
Why the McDonald's Sales Decline Was a Big Deal
Sometimes we lose sight of the scale of America's beloved burger joint. It's not just here; McDonald’s Corporation (NYSE:MCD) operates the largest chain of restaurants globally. McDonald’s is established in about 120 countries and attends to more than 55 million customers every day. The company has 34,000 restaurants and more than 1.7 million employees. But while McDonald’s had experienced a steady growth in revenues, it has lately been experiencing financial difficulties.
For 25 years the company has paid dividends, and the dividends have increased consecutively over these years. It was only in October 2012 that the company experienced a drop in its monthly sales, breaking a trend of sales increases that had dominated for nine years. A look at this company from the various geographical locations reveals that it had a 1% increase in revenues in the United States from 2009 to 2012. In the European market, revenues within the same period grew by 18%. In Asia, Africa and Middle East, revenues rose by 43%. Based on this previous performance, McDonald’s is expected to have an operating margin of 50% and a revenue growth of 5% year on year for the next nine years.
The company’s 2012 third quarter earnings were therefore much of a wet blanket to investors who felt that "good times were here to stay." Total earnings dropped by 3.3% to $1.46 billion. Revenue was $7.2 billion, as the company felt the effect of the strong dollar and lost some cents per share during conversion. Worse yet, the decline in revenues followed the appointment of the new CEO Don Thompson, which sets a negative tone in the new environment. The company is, however, optimistic that it will raise earnings by 10.2% in 2013. The company has to put its best foot forward, as it is facing competition from other restaurant chains, such as Wendy’s and Panera Bread Co (NASDAQ:PNRA). As a strategy for growth, the company purposes to double the number of restaurants in China. I believe this offers a tremendous gateway to value creation.