McDonald’s (MCD) has put together an extraordinary 2010—so far. But I’m not as excited about the second half of the year, especially not at current share prices.
On Monday August 9 McDonald’s announced that global comparable store sales climbed 7% in July from July 2009. Sales at restaurants open for 13 months or more rose 5.7% in the United States and 10% in Asia, Africa, and the Middle East.
McDonald’s sales are indeed hitting on all cylinders: the dollar menu, new higher priced menu offers, frozen frappes, and upgraded coffee drinks have all boosted sales since their roll outs.
However, it’s not sales that worry me but margins. In the first half of 2010 McDonald’s benefitted from falling commodity prices for wheat, corn syrup, sugar, beef, chicken and other raw materials. In its last conference call with analysts the company said that it expected commodity prices to continue to decline in the second half of the year but at a reduced rate.
With wheat and other grain prices soaring on drought, wild fires, and grain export bans, I don’t think declining commodity prices are guaranteed in the second half of 2010.
That wouldn’t be a problem except that the stock has become rather expensive given the 13% earnings growth projected by analysts for 2010 or the 8.2% growth rate projected for 2011.
The works out to a price to earnings growth (PEG) ratio on 2011 earnings growth of almost 2. (Growth at a reasonable price investors look for a PEG ratio of 1 or so.)
That doesn’t leave much room for a disappointment on margins if commodity prices stay high or climb higher for the rest of 2010.
The stock is up 17% so far in 2010, compared to a 1% gain for the Standard & Poor’s 500. I’d give it a rest here and look for a better second half stock.
As of August 12, I’m selling McDonald’s with a gain of 21% (plus dividends) since I bought the shares on January 13, 2009.