McDonald’s financial secret sauce contains yuan
Want some yuan with that Big Mac?
On August 19 McDonald’s (MCD) became the first foreign non-financial company to sell yuan-denominated bonds in Hong Kong.
The U.S. company sold 200 million yuan (about $30 million) of 3% notes due in September 2013. Standard Chartered (SCBFF) was the manager on the sale.
The sale marks another step in China’s plan to create a financial system on a par with the markets in Tokyo and New York. That will eventually require China to turn the yuan into a freely exchangeable currency and China is certainly not willing to go there yet. But in February foreign companies became eligible for the first time to sell yuan-denominated bonds in Hong Kong.
It makes sense for McDonald’s to tap into the Chinese funding pool since it is now a familiar brand name in China.
Read more
Sell McDonald’s (MCD)
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.
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. Read more
Update McDonald’s (MCD)
What you want to do about McDonald’s (MCD) in the short run—say, the next six months or so—depends on how optimistic you are about the economy and the stock markets. The more optimistic you are, the less reason you have to hold McDonald’s. The more you believe that the stock market might stall or correct slightly over the summer, and the more you’re worried about economic growth slowing (but not stopping) in the second half, the more you’ll want to hang onto your position.
I fall, frankly, into the more pessimistic second camp. So I’m going to keep these shares in Jubak’s Picks. The company’s first quarter earnings, announced on April 21, make the decision to stay on board much easier.
The story in the company’s first quarter earnings was simple: Growth in the U.S. is back. Read more
Update McDonald’s (MCD)
Economists aren’t sure but McDonald’s (MCD) is investing for a global economic recovery.
McDonald’s expects to increase global capital spending to $2.4 billion in 2010, up from $2.1 billion in 2009. That will let the company add 1,000 new stores and “re-image’ 2300 more. To put that capital budget in the context of the rest of the fast-food industry, the $300 million increase in McDonald’s capital spending is larger than Burger King’s (BKC) entire capital budget, Deutsche Bank calculates.
The increased spending includes a 25% increase in capital spending in China that would finance the opening of 150 to 175 new stores in China in 2010.
None of this is terribly surprising when viewed through the lens of the company’s February 9 report of same-restaurant sales for January. Read more
