Update McDonald’s (MCD)
If you’re worried that the U.S. and global economies are going to slow in the second half of 2010, then McDonald’s (MCD) on its second quarter performance is the stock for you. (Of course if you think the upswing of the last week isn’t just a bounce, McDonald’s isn’t the stock for you. See my post Two weeks of summer rally or three days of bounce? )
The company reported earnings on July 23 for the quarter of $1.13, a penny better than the Wall Street consensus, and revenue of $5.95 billion, slightly above projections for $5.91 billion. Comparable store sales climbed 3.7% in the United States, 5.2% in Europe, and 4.6% in the Asia/Pacific, Middle East and Africa business unit.
And that’s without any big macro trends in its favor. Unemployment remains high in the United States, cutting into the spending of the company’s customers. European economies are growing slowy and the euro/dollar exchange rate worked against the company in the quarter. Japan remains, in the company’s words, challenging—as it has been for the 20 years of economic stagnation.
The company is managing to grow revenue and earnings by introducing new menu items—coffee drinks, frappes, and fruit smoothies—adding more value menu items, and what the restaurant industry calls reimaging in Europe.
What may be most impressive about the company’s performance, however, is that it has managed to increase operating margins even as it introduced new menu items and expanded its value menu. Operating margin in the quarter grew by 1.3 percentage points to 31%.
In its conference call the company said that exchange rates would hurt third quarter earnings by about three cents a share (four cents a share for the full year). The company has benefitted from lower commodity costs in the first half of 2010, but McDonald’s expects that commodities will decline at a slower pace in the second half of the year. McDonald’s has opened 48 restaurants in China so far in 2010 and is on track, the company said to open 150-175 for the full 2010 year.
As of July 27, I’m upping my target price to $76 a share by September from my recent target of $74 by July 2010. The stock paid a dividend of 3.2% as of July 27.
Full disclosure: I don’t own shares of any company mentioned in this post.
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I am just back from China and McDonalds is small potatoes. you see KFC everywhere. seeing the Chinese food preference I have some real doubt that McDonalds will have the same success as the rest of the world.
MCD probably won’t make you rich, but it usually outperforms the market and pays a nice dividend. I’ve owned this for years and will probably own it forever.
No doubt MCD is a terrific company but I really do think it is over priced at the moment. The time to take some profit is when everything has been going so well. MCD has the law of large numbers to overcome and is priced for perfection partly because big mutual funds find it very liquid and a nice safe place for a position.
On a relative basis Burger King is a much better buy since they have quite a few management issues that can be fixed, they have a superior burger product, and I think they are more popular with the fastest growing segment of the population…the Latins. I’m selling some MCD and putting the money in BKC in the $17 range. Both are also good companies if you are worried about the overall economy.