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McDonald’s Corporation (MCD) Key Question: Are the Golden Arches Still Golden?

Published on April 28, 2013 at 1:51 pm by The Motley Fool in News
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Management has previously expected weakness in China to lead a 25% fall in same-store sales for the first quarter of 2013; however, the company reported same-store sales down only 20%, part of which has driven the stock up over 5% after earnings. Yet, earnings were still down over 26% year-over-year for the first quarter, and management affirmed its downbeat 2013 guidance.

The Yum! Brands, Inc. (NYSE:YUM) China issues have only further brought to light the regulatory and health issues related to operating in China. These are headwinds that are in addition to a slowing Chinese economy. However, one positive for McDonald’s is that it does not get a majority of sales from China, unlike Yum! Brands, Inc. (NYSE:YUM), which derives some 45% of revenues from China.

Where McDonald’s had notable billionaires as its top hedge fund owners, Yum! has niche-concentrated hedge fund Joho Capital as its top hedge fund owner by shares. Joho had nearly 10% of its public equity portfolio invested in the fast food company at the end of 2012.

Strengths

No matter where you go in the world, there’s still a line at the local McDonald’s Corporation (NYSE:MCD). In fact, McDonald’s and The Coca-Cola Company (NYSE:KO) are probably America’s greatest brand ambassadors. Children of all ages grow up knowing about these brands and wanting their products. The McDonald’s brand continues to grow globally and expand.
McDonald’s is constantly adding new menu items. The company’s test kitchen has done an excellent job of identifying new menu items to appeal to a wider audience. Recently the company added Fish McBites, Grilled Onion Cheddar burger, and Hot ‘n Spicy McChicken. New beef sandwiches and chicken entrees are expected next. McCafes continue to be rolled out into stores and are capturing the demand for coffee and coffee products. The McCafe is McDonald’s effort to capture part of Starbucks Corporation (NASDAQ:SBUX) market share.
Most notable hedge fund investors include billionaires Jim Simons (RenTech), Ken Fisher (Fisher Asset Management) and Ken Griffin (Citadel Investments), all owning over 3.5 million shares at the end of 2012.
McDonald’s shares

Shares of McDonald’s Corporation (NYSE:MCD) just recently hit a new 52-week and all-time high of $103.70. However, the stock is only up about 5.9% in the past year. The stock has been trading in a sideways pattern above $100. Hence, it’s low beta of 0.3. Operating margins are still high at 30.3% and return on equity comes in at 36.8%. On the balance sheet, there’s $2.3 billion in cash to $13.6 billion in debt.
The current annual dividend is $3.08 per share for a yield of 3%. Of the analysts that follow the stock, five have it rated as a Strong Buy, 10 a Buy, 13 a Hold, and one an Under-Perform. Price targets on the stock range from $91 to $120 with $103.50 being the median target. The stock is trading at 18.6 times forward earnings, while Jack in the Box Inc. (NASDAQ:JACK) trades at 21.2 times and Yum! 19.3 times.

Assessment

Over the long-term I’m bullish on the stock. However, the company is struggling with resistance here above $100. The H7N9 virus is a concern going forward and will impact China same-store sales. I recommend buyers wait for a dip into the $90s before buying.

The article Are the Golden Arches Still Golden? originally appeared on Fool.com and is written by Marshall Hargrave.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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