McDonald’s Corporation (MCD) Churns Higher on Improved Margins Abroad

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McDonald’s Corporation (NYSE:MCD , the world’s largest fast food chain, recently reported its results for the fourth quarter, beating analysts’ estimates. Profit rose very slightly from $1.38 billion in 2011 to $1.4 billion in 2012. Quarterly earnings per share rose to $1.38 as net margins improved slightly on increased non-U.S. margins. However, sales in the Japanese and European markets were soft, as would be expected with both areas in recession. Global comparable sales were essentially flat at +0.1%, which is statistical noise.

McDonald's (MCD)The total revenue for the organization rose from $6.82 billion to $6.95 billion, up 2% over the same period last year, versus analysts’ estimate of $6.89 billion. The sales at McDonald’s company-operated stores increased by 2% to $4.66 billion, while franchise restaurant sales increased by 3% to reach $2.29 billion.

Comps in the United States for the quarter rose by just 0.3% due to competition and economic pressures while operating income was flat overall, not a source of margin increase.  It was in Europe and APMEA (Asia-Pacific, Middle East, Africa) where margins improved, though comps were off.  Income in the European market went up by 5%, with a major contribution coming from the UK and Russia though sales fell by 0.6%. APMEA comps declined by 1.7%, but operating income remained fairly flat, a net increase in margins.

So, in essence, outside of the U.S. McDonald’s still retains some pricing leverage for even foreign currency translation was a negative driver on EPS by $0.01. Excluding the foreign currency losses, EPS actually increased by 5% from last year.

Although McDonald’s managed to eke out some gains, this was a weak report and management concurred, presenting a cautious outlook for 2013.  According to the company’s CEO Donald Thompson, the economy is extremely volatile, consumer sentiment is not encouraging – the big drop in the Consumer Reports Index points to that – and its rivals are ramping up the competition; thus spending and growth of the restaurant industry is likely to continue with the same trends in the coming year. Sales for January are expected to fall compared to the same period last year versus a 6.7% increase last January.

McDonald’s faces tough competition from Burger King Worldwide Inc (NYSE:BKW) and Yum! Brands, Inc. (NYSE:YUM)’s Taco Bell over new food items and the dollar menu. Burger King has introduced molten fudge bites, sundaes, improved versions of its Italian chicken sandwich and cheesy tots.  Similarly Taco Bell’s value items for $0.99 are being heavily advertised, continuing to focus on the magic price point even as portion size and food quality decline. This is something McDonald’s has in mind, and it is planning on introducing stronger menu items this year. It has started off by testing chicken wings for its outlets in Chicago. Also, McDonald’s is planning to introduce Fish McBites for its customers in the US, along with beef sandwiches, chicken entrees and breakfast menu items in an attempt to boost sales in its second biggest market.

McDonalds Yum Brands Burger King
Market Cap $95.3 Bln $29.02 Bln $6.24 Bln
Stock 6M 5.91% -3.23% 16.17%
P/E 17.67 18.94 0.73
EPS 5.36 3.4 24.46
Yield 3.30% 2.10% 0.90%
Beta 0.31 0.68 N/A
ROE 38.66% 73.68% 7.20%

In the last six months, the much smaller Burger King has outperformed its bigger rivals and the SPDR S&P 500 ETF, which is up by 8.22% in the corresponding period. McDonalds and Yum Brands have a dominant presence all around the world.  Both are increasingly focusing on the emerging markets, particularly China, for their future growth.

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