Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

McDonald’s Corporation (MCD), The Wendy’s Company (WEN): Fast Food Restaurant Is Cheaper Than its P/E Indicates

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.

Investment Considerations

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.

Final Thoughts

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 and is written by Ted Cooper.

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

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.