McDonald's: Safety in Gold - or in Golden Arches?

As people look for safe investment havens during the recession, many are looking at gold. Others, however, might do well to look for the golden arches that are the familiar trademark of McDonald’s (MCD) restaurants. The omnipresent fast food chain reported same store sales for October were up 8.2% over the same period last year. Although the chain’s US figures lagged behind the rest of the world, the reported 5.3% US growth is still a very good number considering the state of the economy. McDonald’s branches in the combined region of Asia, the Middle East, and Africa led the way with 11.5% same stores sales growth, while Europe operations managed a very healthy 9.8%.

McDonald’s revenue has been growing steadily on the strength of its operations outside the United States for some time now. In the US, McDonald’s does well enough in troubled economic times, perhaps as consumers switch from more expensive restaurant fare to the lower priced fast food restaurants. It remains to be seen if a similar pattern exists in other countries. The United States economy has been struggling for the past year, while Asia and Europe have only more recently begun to falter. It is expected that the US will remain in recession for some time yet, but will recover somewhat ahead of the rest of the world since we are further along in the downward cycle.

In either case, McDonald’s probably has little to worry about in the more metropolitan areas of the world. However, in many third world countries, even McDonald’s is seen as a higher end luxury. In these places, McDonald’s restaurants may see slower results more in line with the general economic fortunes of the country in which they reside.

While the continued outlook for sales looks good, costs and profitability may be under some pressure as Reuters reports that the company is facing higher prices for its staple beef and cheese ingredients. However, the company has indicated that it may be willing to raise some prices, particularly of items on its Dollar Value Menu to compensate and maintain profitability. All in all, McDonald’s remains a strong option for investors who are looking for stability in a down economy for the next year or so.

McDonald’s also pays a 3.6% dividend yield, based on its current price of $56.64. After reaching $58.00 per share in pre-market trading on Monday, McDonald’s share price retreated but remained substantially above Friday’s close throughout the morning after the early morning release of the same store sales data. The stock now sits at $54.02.

Disclosure: none

Comments

[mwswi:]

In support of the author's column, it should also be noted that McDonald's CEO, James Skinner, recently purchased an additional 20,000 shares of MCD at $55.00 for a total investment of $1.1 million (10/23/08 purchase date). This increased his overall holdings to 236,700 shares of MCD. The buy was the first for Skinner in at least five years.

Under the terms of McDonald's stock ownership guidelines, Skinner is expected to hold 6 times his annual base salary in shares, or $7.65 million in stock. He exceeded the ownership guidelines prior to his recent purchase and presently owns more than $12.55 million in shares, excluding unvested restricted stock, phantom stock, and options.

When you take into account McDonald's results and Skinner's optimism in the face of an obviously deteriorating economy, it's hard to ignore the largest insider purchase at the company in more than five years. A company lifer, Skinner is now more financially committed to the business than ever before.

Sources: Morningstar, Street Insider.com, finance.paidcontent.or... and Mark Skousen's report at StockAdvisors.com

2008 Nov 15 12:51 PM