McDonald’s Solid Prospects
February 11, 2008
By Greg Sushinsky
Sometimes markets are spooked by numbers going wrong or
stories going wrong, or esoteric factors that are sometimes
quantifiable, sometimes not. Case in point: McDonald’s (NYSE:
MCD), the fast food goliath, reported year-over-year sales for its U.
S. restaurants flat for the first time in over four years back in
December, so the stock was taken down quickly from the 60s into
the low 50s. While traders did their short term thing, longer term
investors were also concerned that McDonald’s could keep up the
stellar earnings growth momentum it had fashioned so unfailingly.
Was this the end of domestic growth, at least in the near term, for
the fast food giant? Was this presaging or reflective of recessionary
effects, something McDonald’s was often considered nearly immune
to?
On Friday last, McDonald’s reported January same store sales at
plus 1.9%, and with its overseas results thrown in, the total figure
was a 5.7% increase. The European figures of over 8% and Asia’s
nearly 8% gains fueled this growth. Investors, at least momentarily
relieved that all near-term growth was not over, that perhaps
McDonald’s could weather the current and possibly continuing
downturn in consumer spending, bid the stock back up over 2% on
the day, from an open of 54.90 to 55.64 a share.
The fast food restaurants, even more than medium or upscale
dining, has traditionally been seen as relatively recession-proof,
almost lumped in with supermarket food stocks as the menus of the
McDonald’s and the like is often comparatively priced with buying
and preparing similar foods at home. McDonald’s, and its
competitors such as Wendy’s (NYSE: WEN) and others have
traditionally featured low-priced dollar menus or items of regularly
eaten foods. This strategy, along with others, has usually carried
McDonald’s through recessions before. A legitimate question is the
slowing of U.S. growth, however, long term. Is the U.S. market
saturated with McDonald’s? While this is always a looming question
for McDonald’s, it’s also a question, though less so perhaps, for its
competitors.
McDonald’s has a market cap of $64B, with net income in 2006 of
$3.5B on revenue of $21.6B. For its fourth quarter of 2007, it
reported 73 cents per share, for the full year it reported $2.89 per
share earnings, up from its $2.45 per share earnings in 2006.
Analysts’ projections look for earnings of $3.17 a share in 2008 for
the company, which is a modest 9.5% growth rate. The prior three
years showed an average annual earnings growth rate of 16.9%.
Historically, McDonald’s has been able to grow its earnings annually
near the 15%, so defensive investors, value investors, and growth
investors all look at the stock, while traders step in on any sharp
prices moves.
February 11, 2008
By Greg Sushinsky
Sometimes markets are spooked by numbers going wrong or
stories going wrong, or esoteric factors that are sometimes
quantifiable, sometimes not. Case in point: McDonald’s (NYSE:
MCD), the fast food goliath, reported year-over-year sales for its U.
S. restaurants flat for the first time in over four years back in
December, so the stock was taken down quickly from the 60s into
the low 50s. While traders did their short term thing, longer term
investors were also concerned that McDonald’s could keep up the
stellar earnings growth momentum it had fashioned so unfailingly.
Was this the end of domestic growth, at least in the near term, for
the fast food giant? Was this presaging or reflective of recessionary
effects, something McDonald’s was often considered nearly immune
to?
On Friday last, McDonald’s reported January same store sales at
plus 1.9%, and with its overseas results thrown in, the total figure
was a 5.7% increase. The European figures of over 8% and Asia’s
nearly 8% gains fueled this growth. Investors, at least momentarily
relieved that all near-term growth was not over, that perhaps
McDonald’s could weather the current and possibly continuing
downturn in consumer spending, bid the stock back up over 2% on
the day, from an open of 54.90 to 55.64 a share.
The fast food restaurants, even more than medium or upscale
dining, has traditionally been seen as relatively recession-proof,
almost lumped in with supermarket food stocks as the menus of the
McDonald’s and the like is often comparatively priced with buying
and preparing similar foods at home. McDonald’s, and its
competitors such as Wendy’s (NYSE: WEN) and others have
traditionally featured low-priced dollar menus or items of regularly
eaten foods. This strategy, along with others, has usually carried
McDonald’s through recessions before. A legitimate question is the
slowing of U.S. growth, however, long term. Is the U.S. market
saturated with McDonald’s? While this is always a looming question
for McDonald’s, it’s also a question, though less so perhaps, for its
competitors.
McDonald’s has a market cap of $64B, with net income in 2006 of
$3.5B on revenue of $21.6B. For its fourth quarter of 2007, it
reported 73 cents per share, for the full year it reported $2.89 per
share earnings, up from its $2.45 per share earnings in 2006.
Analysts’ projections look for earnings of $3.17 a share in 2008 for
the company, which is a modest 9.5% growth rate. The prior three
years showed an average annual earnings growth rate of 16.9%.
Historically, McDonald’s has been able to grow its earnings annually
near the 15%, so defensive investors, value investors, and growth
investors all look at the stock, while traders step in on any sharp
prices moves.
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