McDonald's Is Made For Investors

By Ryan C. Fuhrmann | April 24, 2012 AAA

Fast-food giant McDonald's (NYSE:MCD) kicked off its first quarter in fine fashion. Sales and profits grew steadily, which has been the norm at the company for some time now. These consistent trends should continue indefinitely, and though the valuation isn't compelling, the mix of predictability, growth, and income potential should appeal to investors.

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First Quarter Recap
Revenues advanced 7% to $6.6 billion. Nearly 68% of the top line grew 7% and stemmed from the namesake restaurants owned and operated by the company. The rest consisted lucrative franchise and related fees from franchisees. McDonald's detailed that total franchised sales grew 8% to $2.1 billion for the quarter.

By geography, the United States accounted for just over 32% of total revenues and advanced a very healthy 9%. Europe made up almost 39% of sales and grew a more modest 4%. McDonald's lumps the rest of its international sales into Asia, the Middle East and Africa, and reported strong 11% growth to account for most of the rest of sales. Comparable store sales were consistently in the mid to high single digits across the world.

Cost increases nearly mirrored sales, but slightly lagged to allow operating income to advance 8% to $2 billion. This represented a very healthy operating margin above 30% of total sales. Tax expense rose sharply and lowered net income by 5% to $1.3 billion, but share buybacks boosted earnings per diluted share growth back to 7%. Earnings came in at $1.23 per diluted share.

SEE: A Breakdown Of Stock Buybacks

Outlook and Valuation
Analysts project full year sales growth of 5.2% and total revenues of nearly $28.4 billion. Looking at the competitive landscape, Yum! Brands (NYSE:YUM) is projected to report 9.6% top line growth and total sales of nearly $14 billion. Wendy's (Nasdaq:WEN) will be lucky to log 4% growth and total sales of $2.5 billion. Chipotle (NYSE:CMG), which McDonald's happened to spin off back in 2006, should grow sales 22% to $2.8 billion. Jack in the Box (Nasdaq:JACK) will log around $2.18 billion in sales, but not grow much during 2012.

The consensus earnings expectation for McDonald's currently stands at $5.71, or annual growth just north of 8%. At the current share price of $95 per share, this represents a forward P/E of about 15.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
McDonald's growth in recent years has been nothing short of stellar, and is expected to continue at a very steady and respectable pace. The earnings multiple is high, but not unreasonable, given the company has been one of the most consistent operators in the world. Only Yum Brands can arguably compete on a global scale, but its domestic operations are in disarray and could come back to haunt it. Combined with a current dividend yield of 2.9%, McDonald's should appeal to both growth and income investors.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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