Don’t Panic Over Low Sales At McDonald’s

McDonald’s Corporation (NYSE:MCD) dipped slightly on higher than normal volume after the restaurant- which had topped our rankings of the most popular restaurant stocks among hedge funds at the end of the second quarter- announced that revenue from its portfolio of restaurants open at least 13 months dropped 1.8%. Sales were down in the U.S., in Europe (which is actually the source of about 40% of the company’s revenue) and in emerging markets. This news comes after McDonald’s 10-Q for the third quarter showed that total sales had been about flat compared to the third quarter of 2011, with slightly higher franchise revenue being offset by worse numbers at locations that the company operates. Net income was lower in the first three quarters of 2012 than in the same period in the previous year, but buybacks had powered a very small increase in EPS.

McDonald’s Corporation is now down 14% so far this year, even with the market rising. While its growth has been negative, and future prospects don’t look particularly good with higher-end quick service restaurants picking off some of its U.S. business, the stock remains an attractive value play. The trailing P/E of 16 and dividend yield of 3.5% are good metrics, and on a statistical basis McDonald’s (as one might expect) has little exposure to the broader economy with a beta of 0.3. Analyst expectations are for very low growth next year- likely resulting from flat net income and some buybacks- bringing the forward P/E to 15.

Ken Fisher - FISHER ASSET MANAGEMENT

Among the investors who liked McDonald’s Corporation during the second quarter of the year was billionaire Ken Fisher, whose Fisher Asset Management increased its position to 5.4 million shares (see more stock picks from Fisher Asset Management). Renaissance Technologies, whose success since inception has made founder Jim Simons a billionaire as well, also bought the stock during the quarter and closed June with 5.2 million shares in its portfolio (find more stocks that Renaissance Technologies liked).

McDonald’s closest peers are Burger King Worldwide Inc (NYSE:BKW) and Yum! Brands, Inc. (NYSE:YUM). These stocks trade at considerable premiums to McDonalds, even though that company would generally be regarded as the market leader: Burger King trades at 22 times forward earnings estimates, while Yum’s trailing and forward multiples are both about 20. Burger King’s sales and earnings numbers have not been good either, and so we think that we’d certainly rather own McDonald’s. Yum looks more attractive, reporting growth in both top and bottom lines as that company’s strategy of moving heavily into China continues to pay off. However, we’re not sure that exposure is going to be such a strong point going forward. We might look at the stock further, and it probably isn’t a good short candidate, but McDonalds does seem to be a better value.

Even more highly valued than those peers on a forward earnings basis are Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA) which are trading at 24-25 times their expected earnings for 2013. Both of these companies are experiencing solid growth, obviously, which explains why even this pricing is lower than their trailing P/E (30, in both cases). Revenue growth rates at these quick service restaurants versus a year earlier were remarkably similar, with Panera’s 27% increase in net income being only somewhat higher than Chipotle’s 20% growth rate. We’d expect that growth rate to slow as those companies get closer to saturation, and certainly their premium to McDonald’s is even higher than that of Burger King or Yum.

McDonald’s still has a very secure place in the restaurant market, and compared to its peers it is priced for considerably lower growth rates going forward. While it’s possible that the company could end up posting further disappointing results, these initial numbers aren’t worrisome. One final note: the last month that McDonald’s experienced a similar decline was in 2003. The stock price was up 50% that year and an additional 29% in 2004. We don’t expect that kind of results, but history demonstrates that a month of lower sales isn’t necessarily a sell signal.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!