Shares of McDonald's (MCD) are seeing a modest correction after the release of its second-quarter results on Monday before the opening, as the company experiences continued headwinds in growing its comparable sales.
Despite the fact that shares trade close to all-time highs, shares might offer even better value, trading at 100 times the value of its Dollar Menu, than items on the Menu itself.
The fair valuation is supported by an appealing dividend yield.
McDonald's generated second-quarter revenues of $7.08 billion, up 2% on the year. Results were driven by a 1.0% increase in comparable sales, which was in line with consensus estimates. Total revenues were in line with consensus estimates of $7.09 billion as well.
Operating income of the business rose by 2% as well to $2.20 billion, while net income rose by 4% to $1.40 billion. Earnings per share rose by 5% on the back of share repurchases, coming in at $1.38 per diluted share.
Currency headwinds shaved off two cents from earnings per share. In constant currencies, earnings per share rose by 6%. Headline earnings numbers slightly missed consensus estimates of $1.40 per share.
CEO Don Thompson commented on the developments over the past quarter:
McDonald's results for the quarter reflect our efforts to strengthen our business momentum for the long-term. We remain strategically focused on the global growth priorities that help us better serve our customers. While the informal eating out market remains challenging and economic uncertainty is pressuring consumer spending, we're continuing to differentiate the McDonald's experience by uniting consumer insights, innovation and execution.
Looking Into The Results
U..S comparable sales rose by 1.0%, while operating income came in flat. New product introductions, the strength of the Dollar Menu and classic's supported the performance. Earnings were lagging on the back of an increase in promotional activity.
European comparable sales fell by 0.1% driven by weakness in France and Germany. A solid performance in the U.K. and Russia could not offset weakness in the two biggest nations within Europe. Operating income rose by 5% despite the challenging top-line revenue results.
Comparable sales in Asia-Pacific, the Middle-East and Africa fell by 0.3% on the year before on the back of weakness in China, Australia, and Japan. Operating income fell by 1%, but was up 3% in constant currencies.
Total revenue growth was driven by a 3.6% increase in revenues derived from franchise restaurants. Revenues from company-owned restaurants rose by merely 1.9%, but still makes up two-thirds of total revenues.
McDonald's did not provide a consolidated balance sheet in its second-quarter press release. The company ended the first quarter of the year with $1.87 billion in cash, equivalents and short-term investments. The company operates with $12.80 billion in total debt, for a net debt position of around $11 billion.
Revenues for the first six months of the year came in at $13.69 billion, up 2% on the year before. Net income rose by a similar 2% to $2.67 billion. Full-year revenues could come in around $28 billion, while net income could come in around $5.5 billion.
Trading around $98 per share, the market values McDonald's at $98 billion. This values the company at approximately 3.5 times this year's expected revenues and 18 times earnings.
McDonald's pays relatively steep quarterly dividends of $0.77 per share, for an annual dividend yield of 3.1%.
Some Historical Perspective
The fast food franchise has created a lot of value for its shareholders over the past decade. Since 2003, shares have roughly five-folded from $20 per share towards $100 at the moment, without suffering major setbacks. Trading around $98 per share, shares trade within reach of all-time highs around $103 per share.
Between 2009 and 2012, McDonald's has grown its annual revenues by a cumulative 21% towards $27.6 billion. Net earnings rose by a similar 20% to $5.5 billion in the meantime. Earnings per share growth came in significantly higher as the company retired almost one-10th of its share base over the past five years.
Interestingly enough, shares of the company are trading near all-time highs at a time when comparable-store sales growth is slowing down. The squeezed middle-class and lower end of the consumer spectrum in both Europe and the U.S. limit the pricing power for McDonald's.
The company is actively advertising less expensive menus including the "Dollar Menu" and combo meals, as cash-strapped consumers have limited buying power. On top of that comes the relative strength in the U.S. dollar, which limits revenue and earnings growth as well.
In July, global same-store sales actually came in roughly unchanged. The remainder of 2013 will pose a challenge as well as competition intensifies from the likes of Burger King (BKW) and the $1 menu offered by Taco Ball, which is part of Yum! Brands (YUM).
I am a bit cautious as comparable-store sales is crucial to generate free cash flows, which can be used to return cash to shareholders by means of share repurchases or dividends.
Still it is understandable why investors invest in the company. Paying 18 times earnings for one of the world's strongest brands, with worldwide operations, is not excessive in this low-interest rate environment. Additionally, the leverage is relatively contained at around 2 times annual earnings, while the company pays a dividend yield exceeding the 3% mark.
While the $1 items on its menu offer great value, its shares priced at almost $100 per share, might offer greater value. As a prospective investor you could buy three dollar items on the menu per year from the dividend alone.