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This past week McDonald's (NYSE:MCD) reported a decline of 1.8% in same-store sales for the month of October. It has been almost 9 years since last time that McDonald's posted a negative comparable sales number. Although this news was disappointing, it should come as no surprise to shareholders. McDonald's mentioned in its third quarter earnings call that sales for the month of October were trending down compared to the same period last year. The report highlighted how McDonald's experienced a decrease in sales both in the U.S. and in Europe. The European market makes up roughly 40% of firm's revenue, so any decrease in that market can have a large impact on this sales number. Due to this lower monthly sales number analysts at UBS also cut McDonald's 2013 price target down to $95 per share.

The sales number that McDonald's reported represents the total sales of all McDonald's restaurants that have been open for more than a year globally, while deducting out all currency fluctuations. This number helps provide a clear perspective into the overall profitability of the firm and the overall likelihood of future growth. McDonald's in its third quarter posted an EPS of $1.43 per share, which was below the market expectation of $1.47. It was also below the $1.45 per share that was posted the year prior. Even while the overall net income for McDonald's has continued to come in low for the year, overall quarterly EPS performance has not been all that negative. This is mainly attributed to the size of the share buybacks that McDonald's has been involved in.

So far this year McDonald's stock is down 15.11%, even after hitting an all-time high of $102.22 per share back in January. The stock currently trades for a P/E of 16.04 and has a dividend yield of 3.62%. With all of the lower growth forecasts for next year and essentially flat net income this year analyst expectations for the company are quite low. Given that there are such low growth expectations for next year the forward P/E for McDonald's is currently coming in at around 14.61. The company currently has $3.64 billion in cash on its balance sheet and has a book value of $13.82 per share.

Despite all of the headwinds McDonald's is facing the company is still moving forward with the roll out of new menu options combined with the re-introduction of popular favorites. The newest addition to the McDonald's menu line up is the Cheddar Bacon Onion sandwich. The company also plans to re-introduce the Mackerel Sandwich and the ever popular McRib. The hope is that these new (and old) menu items will entice customers to come back to its restaurants. Given the weaker than average consumer demand and confidence levels the focus for the past several years has been on the firms Dollar menu. In the third quarter conference call the firm said that it is expecting commodity prices to be higher by almost 2% next year. To offset that the company is also trying to bring back some focus on the Extra Value meals, due to the higher margins levels associated with these menu options.

It is obvious that McDonald's has its work cut for it in the coming quarters, but I feel that the stock is still trading at an excellent value compared to its peer group. In the below chart I think it is clear that McDonald's is by far the best value out there compared to other fast-food companies.

Stock

Current P/E

Forward P/E

Profit Margin

Market Cap

Stock Price

McDonald's

16.04

14.61

20.34%

$85.42 B

$85.00

Burger King (NYSE:BKW)

56.91

21.56

1.46%

$5.40 B

$15.40

Yum Brands (NYSE:YUM)

21.16

19.07

13.40%

$32.46 B

$71.85

Wendy's Co (NASDAQ:WEN)

-

25.62

-4.19%

$1.70 B

$4.35

Chipotle Mexican Grill (NYSE:CMG)

30.05

24.67

10.32%

8.14 B

$258.6

Panera Bread Co (NASDAQ:PNRA)

29.54

22.73

6.90%

$4.79 B

$160.95

As I have previously mentioned, I think it is important to note that this is the first time in 9 years that McDonald's has posted a negative sales report. With all of the market sensitivity on growth and the possibility of a double-dip recession next year I understand why the stock has suddenly sold off, but from a valuation standpoint I don't believe that it makes much sense for it trade at these low levels. McDonald's is trading for a very reasonable multiple, especially considering the lowered expectations for next year's numbers. If the economy does pick up or stabilize and McDonald's is able to deliver as they have in prior quarters they should be able to not only meet, but exceed the quarterly numbers for next year. The below chart shows the past four quarters EPS estimates versus the actual postings, as well as the estimates for the next two quarters.

Dec 2011

Mar 2012

Jun 2012

Sep 12

Dec 12

Mar 13

EPS Estimate

$1.30

$1.23

$1.38

$1.47

$1.33

$1.27

EPS Actual

$1.33

$1.23

$1.32

$1.43

TBD

TBD

McDonald's stock currently has a great deal of support at the $80 - $82 per share level. I like the stock at its current price of $85 per share, but I like it a lot better around the $81 to $82 per share level. Being that is the case I would recommend selling some cash secured June 2013 $82.50 puts for $4.70 per contract. I like this trade because it allows you to pick your entry point, in this case $82.50 per share (the current support level), but the trade also pays you to wait for the stock to come in toward that entry price. Additionally, with all of the recent volatility in the stock the premiums on these puts are higher than they normally would be. In this case you are being paid $4.70 (100 shares per contract = $470 per contract sold), creating a real breakeven price of $77.80 per share.

Regardless of any one month sales number, McDonald's continues to dominate the fast food market and compared to its peer group is trading for a considerable lower multiple. I do believe that McDonald's stock price is currently creating a great deal opportunity for anyone who would like to own this great company for the long term, even if more short term pain is felt in the stock.

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