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McDonald’s Corporation (MCD): This Fast-Food Giant May Yield Decent Returns to Investors

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McDonald's Corporation (NYSE:MCD)The fast-food industry was undergoing through a rough phase due to avian flu and horse-meat scandal. It is at this point of time, McDonald’s Corporation (NYSE:MCD) can provide increased return to its valued investors. Since 2002, McDonald’s Corporation (NYSE:MCD) Net Operating Profit After-Tax has grown by 12% compounded annually, its Return on Invested Capital being 16%.

Financials

Recently, this Oak Brook, III -based company announced results for the second quarter, where it generated revenues of $7.08 billion, up 2% on the year. Operating income of the business rose by 2% to $2.20 billion, while net income rose by 4% to $1.40 billion. Earnings per share rose by 5% on the back of share repurchases, coming in at $1.38 per diluted share.

In the U.S., second quarter comparable sales rose 1.0% while operating income was relatively flat. During the quarter, new product introductions across the four key growth categories of chicken, beef, breakfast, and beverages, ongoing support for the Dollar Menu, supported the segment’s sales performance. The U.S. business initiatives are designed to satisfy evolving customer expectations through a balanced approach to value, variety, and convenience.

The company ended the first quarter of the year with $1.87 billion in cash, equivalents, and short-term investments. Revenues for the first six months of the year came in at $13.69 billion, up 2% on the year before. Net income rose by a similar 2% to $2.67 billion.

Competition

McDonald’s Corporation (NYSE:MCD) economic earnings grew 35% compounded annually while, main competitor Yum! Brands, Inc. (NYSE:YUM) only managed 15% compounded annual economic earnings growth. This Louisville, Kentucky based company reported an unimpressive earnings release for the second quarter as the Chinese poultry scandal weighed down the firm’s sales in China.

There is a 12.2% decline in sales in June, which is lower than what analysts had expected. The company’s revenue declined by 8% year-over-year to $2.9 billion. Earnings-per-share was even weaker, falling 16% year-over-year to $0.56 per share. Second-quarter profits fell 16% as KFC’s same-store sales in China fell 20%.

Yum! Brands, Inc. (NYSE:YUM) is expected to recover in the second half of the year. China is the most critical market for this fast-food chain as it sees tremendous growth potential in this emerging economy. After being accused of using chicken with unapproved levels of antibiotics, Yum! Brands, Inc. (NYSE:YUM) has adopted a new marketing strategy. Other than cutting ties with suspected food suppliers, the company has deployed a rigorous quality control check process and is showing new ads to win back lost customers.

Another competitor of McDonald’s Corporation (NYSE:MCD) is Burger King Worldwide Inc (NYSE:BKW), whose 99 percent of restaurants are owned and operated by independent franchises which give a steady stream of franchise royalties and rental income. In the recent quarter, the Miami-based company’s revenue fell about 42 percent to $327.7 million. Total restaurant expenses, fell nearly 70 percent to $108.1 million. The company’s restaurant revenues tumbled 69 percent to $121.1 million, but its franchise and property revenues rose 19 percent to $206.6 million.

Recently, Burger King Worldwide Inc (NYSE:BKW) announced the expansion of its home delivery services into a number of markets like Boston, New York, Miami, Houston, Los Angeles, Chicago, San Francisco Bay Area, Las Vegas, Sacramento, greater Washington, D.C., Phoenix, and Denver. Further, Burger King is bringing back their two for $5 Mix & Match limited-time deal on a selection of the chain’s sandwiches/burgers followed by an introduction of low-cost food for its customers. From operation point of view, this company has expanded the number of field employees from 90 to 250.

In contrast to McDonald’s Corporation (NYSE:MCD), Burger King Worldwide Inc (NYSE:BKW) exhibits average growth rates for its industry as well as average margins. The company’s management effectiveness ratios are comparably low, as its most recent return on equity was 10%, return on assets was 2%, and return on investments was 2.8%.

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