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.
@ryanpatrik
BKC was a great buy!
Sold MCD at 73.5 and bought JNJ as a replacement to secure the dividend. Like Jim said, commodity prices are going up and dollar is moving up against bunch of foreign currencies. the upside does not look too good at current price.
Maybe you can start a mutual fund! Seems to be all the rage. My son would agree with you on the MCD fries but why is the shake machine out of order half the time? Chargrilled baby……….come on you know you love it!
Taste Great! Less Filling! Taste Great! Less Filling!
Is there a way to invest in MCD’s fries, Wendy’s burgers/chicken, and BK’s buns?
djpoints…no worries, lol. Let us see who is right. My money says MCD is essentially dead money but for the dividend and is priced so much for perfection that it is set up for a fall to the low mid 60s. BKC is priced for a swine flu epidemic and has a good 20% upside short term. Take some profits and come home to the Whopper!
Back to the companies and Not the stocks, hot off the press as of the am:
http://www.zagat.com/fastfood#
ryan, nope read my post again, I didn’t miss your pt that you think bk is a better stock. Yes, everyone knows Mickey D’s is a better run company. I just explained why I think MCD is still a better stock — even at its current premium.
djpoints, pardon the pun, seems to have missed my point. MCD is the better company but right now BKC is the better stock. Just make sure you sell the BKC when it reaches the low $20s.
My first post here…first of all thank you Mr. Jubak, I’ve been following your posts and articles the past 3 years and you have helped me a great deal with investment knowledge and your recommendations.
I purchased MCD a while back for dividends and potential growth and have been very pleased. Looking at the chart, if one was inclined to sell now would be a good time as share prices and valuation are at a high. I’m not quite sure what to do with this one though, I think the stock still could go higher. I sold Aug 72.50 calls on the shares I own so the decision might be made for me in another week, we’ll see. If so I’ll wait and see where it goes in case an attractive re-entry point for at least the short term comes along.
MCD is one of my larger holdings with a cost basis of $45. So full disclosure, I love this company and stock. I really bought it as part of my dividend portfolio, so its cap apprec. has been a huge/unexpected bonus.
Jim’s excellent analysis led me to dig a little deeper. It looks like most of MCD’s growth has come from the higher margin rapidly expanding drink menu. Yes, commodities obviously are used to make these drinks, but less than half of the ones Jim cited above.
I also can not help but see the much much longer lines compared to BK, Wendy’s during all hrs at the 4 stores right around me — and the diversity of the people eating there. They are attracting all walks of life like never before!
As Ryan said above, one of these fast food chains has a place in your portfolio in this econ. I’m sticking with MCD.
I agree with this move as well and said as much in a comment to the last MCD update. Given the uncertain economy and high unemployment however I think this sector is a good defensive bet so I swapped into Burger King. It is not nearly as well run as MCD but now is one of those times when the lesser player is the better stock. Under $17 BKC is bargain at a pe 68% of MCD’s with plenty of room for management to fix problems and narrow the gap with MCD.
BKC is also very popular with the fast growing latin population if my observations here in Florida are accurate and they have a good presence in Mexico. The food also tastes better by far.
Bottom line, both MCD and BKC are good slow economy plays but MCD is priced for perfection and BKC is primed for any kind of improvement at all and trading near 2009 lows. If you really are risk averse sell some of the $17.5 puts.
Jim, you show a sell price for MCD at $72.74 but I can’t see that it ever made it over $72.15. Is this a typo?
@Cheap South-
Lol! I thought it was just me that consistantly happens to!
@Butterfield8 – the reason they are tanking is because I bought them (but I did not buy McDonalds!!!)
Off topic:
Any thoughts on ASML and WHR. They seem to be tanking pretty hard. Though both were a bit longer term on the hold.
Jim,
Thank you Sir.
Nobody ever went broke booking a profit. Nice call.