There are no durable competitive advantages in the industry. All restaurants — including McDonald’s — are subject to intense price competition. However, McDonald’s Corporation (NYSE:MCD) has shown a unique ability to navigate the competitive landscape in a manner that allows it to earn consistent free cash flow.
At 18.1x earnings, investors are paying full price for McDonald’s growth opportunities and superior operations. But if the company can solidify itself as a serious competitor to Starbucks Corporation (NASDAQ:SBUX), continue to fend off rivals in quick-service restaurants, and continue to grow in emerging markets, then shareholders will be rewarded even if they have to pay up for growth.
The company currently trades at 12x last year’s pre-tax income. If the company can grow at 4% per year over the next few years, then the stock today is worth about 15x pre-tax earnings — or $120 per share.
Sometimes it is hard to stay on the sidelines, especially in a rising market. McDonald’s Corporation (NYSE:MCD) offers investors reasonable growth at a reasonable price. That’s about the best you can hope for as investors run out of places to put cash to use.
The article Fast Food Restaurant Is Cheaper Than its P/E Indicates originally appeared on Fool.com and is written by Ted Cooper.
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