Yum! Brands, Inc. (YUM), McDonald’s Corporation (MCD): Is The Cost of Doing Business Too High?

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China hasn’t been the profit driver for McDonald’s Corporation (NYSE:MCD) as it has for Yum!. Less than 5% of operating income is from China, and the company announced during its latest earnings release that it wouldn’t be expanding in China as much as planned. This ice investigation will barely affect them.

But McDonald’s Corporation (NYSE:MCD) just reported disappointing numbers on July 22, and has underperformed the S&P 500 over the last year, gaining only 10.81%. It does offer a larger yield at 3.10% and is a Dividend Aristocrat, however.

It trades at a price/book of 6.42 and a PEG of 2.04. Margins have been declining over the last three years in Europe, Asia, and the US, even as the company scrambles to bring in traffic with promotions and new menu items. CFO Peter Benson stated in Q1 they were willing to sacrifice a little margin to win market share.

If you have to play China but want a US-based company, Wynn Resorts, Limited (NASDAQ:WYNN) would be my bet as it’s the purest play on the Chinese gambling mecca Macau, offers a yield of 3.00%, has been performing well with a resurgence in Vegas (the stock is up 43.42% this last year), and has a founder/CEO in Steve Wynn.

Almost three quarters of revenue is generated by Macau for Wynn Resorts. Although analysts have seen a slow VIP play for the last few weeks, they seem to agree that the long term growth picture for Macau and Wynn Resorts, Limited (NASDAQ:WYNN) is intact. Wynn Resorts, Limited (NASDAQ:WYNN) has come up against ” the cost of doing business” in China with charges of bribery and violations of the Foreign Corrupt Practices Act, as gifts to officials are customary but frowned upon by the US government and easily misinterpreted.

The cost not to do business

Companies can’t afford not to do business in China (except Google). With the world’s second largest economy and a rapidly growing and aspirational middle class, it’s a higher risk to have rivals plant their flag than endure some setbacks.

I would prefer to play China through the Macau casinos and Wynn Resorts. Eventually, these Chinese headlines and Yum! will settle down, and the company can take its rightful place as one of the pioneers of trade with China. Maybe McDonald’s Corporation (NYSE:MCD) is playing it too safe in China. We’ll see who reaps the rewards of paying “the cost to do business.”

The article Is The Cost of Doing Business Too High? originally appeared on Fool.com and is written by AnnaLisa Kraft.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends McDonald’s. The Motley Fool owns shares of McDonald’s. AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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