McDonald's Continued Success Is Largely About Infrastructure

Jan. 4.13 | About: McDonald's Corporation (MCD)

McDonald's (NYSE:MCD) will see continued success largely because of its expansive infrastructure. The company now has over 34,000 restaurants in 119 countries. When the family has finished up at an away soccer game and hungry on the way home, chances are that the kids will be begging for McDonald's and the driver won't have to look too far to accommodate them. When price conscience consumers need a pick-me-up on the way to work, they can get a decent cup of coffee and an Egg McMuffin somewhere on the way. Contractors working miles from home can easily find a McDonald's close to their work site. Working stiffs short on time can connect their iPad to free Wi-Fi at McDonald's while eating their Angus Burger and Fries.

Consumers need not travel very far for convenient food of consistent quality in the more populated areas of the United States. Just look at the map which shows the density of McDonald's restaurants in the continental U.S. The map is lit up like the sun.

Click to enlarge

The map displays a compelling visualization of the high concentration of restaurants. This shows the expansive infrastructure that is in place, generating revenue and earnings for the company in the lower 48 states. Of course, the company is not limited to the United States. It operates in 119 countries throughout the world.

Here is a map showing which countries currently have McDonald's on their turf.

Click to enlarge

The recent increase in Social Security taxes that all working Americans will see in their paychecks this week is bullish for McDonald's. Workers have gotten used to the 2% cut in Social Security taxes for the past two years. The tax cut was perceived as a raise in 2010, but now its return to pre-stimulus levels will be perceived as a pay cut, plain and simple. It is less money in the hands of working Americans. This will cause people to cut back on certain purchases. This will mean some families will dine at McDonald's instead of other pricier restaurants. MCD's expansive restaurant footprint will allow price-conscience consumers to easily adjust their dining habits to make up for the loss in pay.

The McDonald's naysayers argue that McDonald's only sells unhealthy food and that the move towards healthier food will hurt the company. McDonald's can update its menu as it sees fit. The company has already added healthy options to the menu: oatmeal, salads, apple slices, and real-fruit smoothies. The company can modify the menu to suit the demands of consumers based on what the popular cravings are. MCD has the real estate in place - it just needs to remain nimble to change the menu as consumer's demand change. If tofu burgers become the popular choice, then MCD can put it on their menu.

The company has a knack for catering to the specific countries that it operates in. For example, MCD restaurants offer various vegetarian foods in India, where the vegan lifestyle is a part of the culture. This concept is duplicated throughout the world. The company knows what foods are popular, therefore it accommodates the locals.

McDonald's is fairly valued with a forward PE ratio of 15.68, a PEG of 1.88, and a price to book ratio of 6.52. Since there aren't too many extreme surprises either positive or negative for the company, it typically remains fairly valued. The stock is trading about 11% below its 52-week high of $102, but has recovered to $90 from hitting a low of $83 a few months ago.

The company is a great dividend paying stock. McDonald's has increased its dividend every year since 1976. The stock now provides a respectable yield of 3.5%.

MCD is expected to grow earnings annually at 8.8% for the next five years. This should allow the stock to appreciate approximately in-line with the market. However, when factoring in the dividends, investors can expect above average total returns over time. I would recommend the company as a long-term dividend reinvesting position.

Disclosure: I am long MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.