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.

blog comments powered by Disqus
Insider Monkey Headlines
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

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

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!