Finally — though perhaps a little unfairly — the company is really starting to take advantage of its franchise model by leveraging the clout of its name in a couple of ways.
Much like The Wendy’s Company (NASDAQ:WEN), McDonald’s is looking to get out of the company-owned restaurant business by converting as many locations as possible to franchises. Though doing so lowers revenue, franchise fees are much higher-margin revenue. As part of those deals, the company usually keeps the underlying rights to the real estate, and carries that property at cost on the books. Translation: McDonald’s will effectively own a bunch of undervalued real estate.
But at the same time, McDonald’s move is ruffled some franchisees’ feathers. McDonald’s franchise fees have increased to a hefty average of 12% of store sales. That equates to an average of $300,000 per year being forked over from franchisees to the corporation, up from $212,000 (8.5% of sales) just five years ago. Franchisees are grumbling, but they have little choice in the matter.
Putting it all together, McDonald’s has more going for it now than the market’s giving it credit for.
Risks to consider: Though unlikely to actually change the status quo, the recent movement to increase minimum wage rates at fast-food restaurants will cast at least a modest shadow of doubt on the company’s viability.
Action to take –> It’s admittedly tough to jump off what seems like a rocket stock, but veteran investors know nothing lasts forever. Wendy’s is a fine company, and the stock should do well in the future. But for the time being, shares are overbought and ripe for a pullback. It’s better to be out too early than too late. On the flip side, McDonald’s have been suppressed for a little too long and are due for better days.
The only consideration to make before booting Wendy’s is just how close this idea is to incurring a long-term taxable gain as opposed to a short-term taxable gain. The original suggestion was made on Aug. 16, 2012, so you’ve been in for nearly a year. It may be worth holding a tad longer if you’re on the short-term/long-term taxable gain bubble.
P.S. — Imagine if you had invested in McDonald’s 10 years ago — and held on to your position. You would be sitting on a return of more than 400% (not including dividends). My colleague Elliott Gue and his staff recently went looking for the absolute best stocks on the market. The goal: Find stocks like McDonald’s that are good enough to buy, forget about and hold “Forever.” After six months and $1.3 milllion worth of research, the team was successful. To learn more about the “Forever” stocks that they uncovered — including some names and ticker symbols — click here.
– James Brumley
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