RD's Picks

McDonald's (MCD) seemed like a good place to start catching up on research. I've had it on a watchlist for some time, Armin recommended it in a blog reply back in January, Jamie suggested it last week and today Jim Jubak mentioned it in an MSN Money column.

On 08/08/08, the company reported global comparable sales up 8.0% year over year. System wide sales were up 9.5% yoy in constant currency; 15.9% when currency exchange is factored in. System wide sales increases were particularly strong in Europe and Asia/Pacific, Middle East and Africa. In those areas, there was a big difference between system wide sales, which includes new stores, and comparable sales, which are only stores open for at least 13 months. That would reflect a substantial growth in the McDonalds' footprint in those regions.

The 23 July conference call reporting second quarter earnings painted a picture of solid business execution, growing revenues and growing earnings. Ralph Alvarez, Chief Operating Officer, stated, "Comparable sales for the quarter were up 3.4%, of which 75% came from increased guest counts." Not many businesses can boast an increase in customers in a soft economy. One of MCD focus areas is beverages and customers can expect to see a broader selection of premium drinks rolled out in 2009. Management is also looking to expand MCD in Russia - "143 million people but only 195 McDonald's restaurants today."

MCD is reasonably priced. Based on the 12 Aug close of $63.94, it trades at just under 17 times 2009 earnings estimates. That's not a screaming buy, but is a slight discount to the S&P 500 '09 PE of about 18. MCD pays a dividend yielding 2.3% and the company "has raised its dividend each and every year since paying its first dividend in 1976" according to the Investor Relations page. Music to my ears.

Risks include rising commodity costs, although based on the conference call, management seems to have the situation under control. About the only other risk I see is if business execution were to slip. Again, current management is introducing products customers want and is well positioned to continue expanding the brand.

We aren't going to discover any overlooked piece of information on a Dow 30 stock like MCD (there were 17 analysts listed on the conference call) and it isn't going to be the quick double you brag about over coffee at work. But, this is a company that's executing well with solid earnings prospects and steady growth trading at a slight discount to the overall market. The stock price jumped on the 8 Aug news release, but has pulled back some. I think the stock is a good value here in the low 60's, a market PE would take the stock to $70. The relatively low risk business model and steady growth prospects arguably justify a slight premium to the market. Like most stocks in this market, nibble and accumulate on pullbacks is a prudent strategy for building a position.

Since selling BUD after the buyout was announced, I've got room for another core dividend payer in the Marketocracy portfolio. McDonald's is definitely on the short list.

All conference call quotes from the transcript at SeekingAlpha.com. Thanks to them for a great, free service.

No position in any stock mentioned at time of posting.

Comments: View Comments |  Tuesday August 12, 2008  |  Stocks: MCD,