McDonald's Corporation's (MCD) stock has risen by over 20% in the last four months. After reaching its all-time high stock price of around $100 in January 2012, the stock went through a rough phase, sliding down approximately 17% and reaching its lowest level in Nov 2012. It has again gained momentum and has re-achieved its previous highest level. The question now is if the stock will continue to rise further and should the investors hold on to their investments, or is it time to book profits?
Strong business performances
The company has had an average annual growth rate of 5.4% in revenues and an average annual growth rate of net income of 15.7% over the period of 2003-12. This shows the profit margin that the company possesses has been increasing at a faster rate than the revenues. In its last annual report, the company increased the cash dividends by 10% to $0.77 for the fourth quarter, bringing the current annual dividend to $3.08 per share. This suggests the management has provided return to its shareholders for its strong business performance.
McDonald's international expansion
The company has around 34,000 restaurants in 119 countries with an average of around 68 million customers being served every day. It has posted growth in every geographical region in which it has operated so far. The best thing about McDonald is that it innovates itself according to the location it is operating in, both in terms of the menu it offers and the prices it demands. Due to a large populations and limited penetrations in emerging countries like India, and China, the company has been able to increase its sale by more than 50% in the last five years, while it has almost stagnated in the U.S. and Europe. This depicts that the sales in the countries outside the U.S. and Europe will drive further growth for the company. It has already announced its expansion plans in Russia and China, due to a rapidly increasing income level of people in these countries. Due to these emerging opportunities, an increase in the stock price is expected in the coming few years.
Yum Brands (YUM) is the largest competitor for the company that operates more than 39000 restaurants across the world under various names like Taco Bell, KFC, Pizza Hut etc. Its earnings are expected to grow annually at around 11.7% over the next five years. It is a huge threat to McDonald's as it too is expanding internationally at a fast rate as well. The P/E ratio of McDonald's and Yum Brands are 17.5 and 21.2 respectively, which is much lower than 30, the average P/E ratio of the overall restaurant industry. One of the drawbacks for Yum Brands currently is that it relies too heavily on the Chinese market for revenues while McDonald's is more evenly spread globally.
Dominos Pizza (DPZ), operates in a different segment altogether, but due to its presence at almost every place where McDonald's is, it affects the company's sales to some extent. Dominos has experienced a high growth in its EPS in the last five years and is expected to rise further this year due to robust increase in revenues and profit margin.
McDonald's is currently trading close to $101, giving it a P/E ratio of 17.5. This multiple is less than its other competitors like Yum Brands with a P/E ratio of 21.2 and Dominos Pizza with a P/E ratio of 21.9. This suggests that the company's stocks are relatively undervalued and may rise in the future with its growing sales and profit margin.
It has been seen that despite the economic downturn, the revenues for the company rose. People spent their money at McDonald's no matter what the economic scenario was. This proves that McDonald's is almost economy-resistant. This is one of the most positive aspects for the company over its competitors in the next two-three years as the world is currently recovering from the financial downturn and this will allow the company to grow further.
The company further plans to open more than 1500 restaurants across the world. It is currently trying to strengthen its breakfast menu to capture another segment of the population. The growth of this segment is expected to be immense in emerging countries due to a large working population that requires on-the-move breakfast while going for work. Therefore this is expected to increase the company's revenues in the next few years.
The stock is trading at an almost all-time high stock price, and the probability of any significant short-term appreciation in prices is not much. This is because it has reached its resistance level, and will correct itself over the short term. But, continuously increasing sales and cash flows, re-investment of the earnings for further growth, international expansions across the world especially in emerging markets are some of the key factors due to which the company is expected to provide high returns in long term. Therefore a long-term investor can buy the stock as soon as it reaches its support level of $85 the next time.