McDonald's Looks Like A Delicious Long-Term Investment

| About: McDonald's Corporation (MCD)

2013 was a challenging year for McDonald's (NYSE:MCD). Still, the company managed to deliver a solid profit in the each quarter of last year. Its share price moved only 8% last year, from $90.12 per share to more than $97 per share.

McDonald's competes in the fast food industry. Growth in the industry is dependent on disposable income and consumer spending. Between 2010 and 2020, Global consumer spending is expected to increase by $12 trillion. Spending on food will account for about 10% of this growth. The United States and China will account for 25% and 19% of the world's spending growth through 2020, respectively. Both, the U.S. and China are important markets for the company. The world fast-food industry is expected to generate almost $240 billion in 2014, representing a 19% increase over five years.

McDonald's is facing stiff competition in the U.S. market. It is trying to increase its U.S. market share in 2014 by introducing new initiatives based around customization and speed. These include new ''build your own burgers'' concept, and a third drive-thru window to rebuild or newly built restaurants. To McDonald's, customization is a great opportunity to foster growth. These initiatives will help to enhance customer experience, overall profitability, and returns of the company.

In the U.S., fast-food restaurants have saturated the market. McDonald's has promising growth opportunities in the international market, and it has been taking advantage of them. Asia and the Middle East are regions where the US-based fast food brands have not saturated the market yet and where these operators are booming. With the improving global economy in these regions, discretionary spending will rise and food is one area where consumers like to spend.

McDonald's is rapidly expanding its presence in China, where it has great growth opportunities. Fast food and takeaway market in China is expected to reach RMB 1.8 trillion by 2017 largely bolstered by rising economic power in lower-tier cities. McDonald's plans to spend nearly $3 billion this year on 1,600 new restaurants around the globe. China will get one of the biggest shares. By year-end, the company will have more than 2,000 restaurants in China, more than anywhere else except the U.S. and Japan. Even more importantly a very high percentage of the restaurants within China are the company owned and therefore generate higher profits than franchised restaurants. Greater success within China could also open the door to more franchised growth as a path to success will have already been demonstrated by the company-operated restaurants.

Recently, McDonald's also opened its first restaurant in Vietnam. For McDonald's, Vietnam is one of its largest remaining untapped markets, a country with 90 million people. The country's fast food industry is growing rapidly. Revenues were $535 million in 2013, an increase of 14.5% from 2012. Between 2008 and 2012, Vietnam's per capita income increased by more than 50% to $1,550. Going forward, the company's revenue from emerging markets is likely to increase gradually and emerging markets will keep its top-line growth healthy.

McDonald's has many competitors in the industry. The company competes on the basis of price, convenience, service, menu variety and product quality. Some of its competitors include: Starbucks (NASDAQ:SBUX), Yum! Brands (NYSE:YUM) and Chipotle Mexican Grill (NYSE:CMG). Some important key statistics of McDonald's and its competitors are given below.





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The chart represents that McDonald's stats are almost as good or better than its competitors. Its operating margin and profit margin is much higher than the competitor. Looking at Price/Earning and Price/Book ratio, McDonald's seems undervalued as compared to Starbucks, Yum and Chipotle.

Another good reason to invest in the stock is because dividends increased from $0.5/stock in 2009 to $0.81/stock in 2013, suggesting that McDonald's will have a brighter future. Last year, the company returned $4.9 billion to its shareholders through dividends and share repurchases. McDonald's payout ratio is only 55% as compared to Starbucks and Chipotle of 593% and 180%, respectively. This indicates McDonald's has plenty of room to grow its dividend.

Financially McDonald's is in very good shape, it is a cash generating machine with impressive solid fundamentals. With the strong financial position, the company will pursue a greater deal of future growth within franchising restaurants. Growing through franchises will help to keep capital expenses lower and debt cheap. It will also defuse the risk allied with opening a new restaurant.

Bottom Line

McDonald's is and has been the market leader in the fast food industry for years. The company will be able to optimize their menus, modernize their customer experiences and broaden accessibility to the brand. McDonald's has been expanding globally, which is another positive for the company. With the strong financial position, it has the ability to continue paying dividends for many years. In my opinion, McDonald's is an attractive long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.