McDonald’s Corporation (MCD) and Its Peers Are Not Cheap

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At the beginning of this year, McDonald’s Corporation (NYSE:MCD) was the most popular restaurant stock among the hedge funds and other notable investors which we track in our database of 13F filings, with 47 filers reporting a position in the stock (find more of hedge funds’ favorite restaurant stocks). The fast food joint was one of the largest stock holdings in billionaire Ken Griffin’s Citadel Investment Group’s portfolio (see Griffin’s stock picks) while the Bill and  Melinda Gates Foundation Trust disclosed ownership of almost 10 million shares (check out more stocks the trust is invested in)


Last year McDonald’s Corporation (NYSE:MCD) made only small revenue gains in both company-operated restaurants and in franchise-related revenue compared to 2011. Earnings actually showed a very small decrease, but as share count was also lower the company delivered $5.36 in diluted earnings per share (up from $5.27 in the previous year). In the fourth quarter of the year revenue and net income were each up 1-2% versus a year earlier. McDonald’s Corporation (NYSE:MCD) is also notable for paying a dividend yield of 3%; between that figure and the stock’s beta of 0.3, it merits consideration as a defensive stock and possibly as a choice for an income portfolio which is short on consumer companies. The restaurant took in about $7 billion in cash flow from operations during 2012, with $5.5 billion in total returned to shareholders through dividends and buybacks.

Currently McDonald’s Corporation (NYSE:MCD) trades at 19 times trailing earnings. Even with continued repurchases causing earnings per share to rise through financial engineering, that valuation looks a bit high given the current state of the restaurant’s business- it’s a pricing at which we’d like to see higher growth in net income. Analyst expectations for 2014 earnings imply a forward P/E of 16. While quick service restaurants do generally trade at high earnings multiples- including considerably higher pricing than McDonald’s- as analysts foresee more business from time-constrained U.S. consumers, many peers are able to match those multiples to better growth rates. As a result we wouldn’t consider McDonald’s a value stock at this time.

Peers include Burger King Worldwide Inc (NYSE:BKW) and The Wendy’s Company (NYSE:WEN). The earnings multiples at these two competitors are high, and even in terms of forward earnings estimates they trade at a premium to McDonalds: Burger King Worldwide Inc (NYSE:BKW) and The Wendy’s Company (NYSE:WEN) carry forward P/Es of 20 and 28 respectively. So we’d hesitate to consider these stocks good values, but they do have good prospects of justifying their valuations if they can continue to improve. The Wendy’s Company (NYSE:WEN), following an earnings surprise, reported EPS of 9 cents per share in its most recent quarterly report; annualizing that figure would make for a P/E of 15. Similarly, Burger King Worldwide Inc (NYSE:BKW) earned 23 cents per share in Q4, a significant q/q increase, and an annualization of that quarter puts the current price at a P/E multiple of 20. We’d also note that Wendy’s pays a dividend yield of almost 3% itself.

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