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Summary

  • While same-store sales growth may not return for several more quarters, I believe in this management team.
  • With the company expecting to return $5 billion to shareholders this year, these shares have been “de-risked.”.
  • Factoring its strong dividend of 3.2%, this is one of the safest company's in any sector. And that alone makes it a bargain.

Fast-food McDonald's (NYSE:MCD) will report first-quarter earnings on Tuesday. With recent concerns about declining same-store sales and new breakfast items from (among others) Taco Bell, McDonald's investors have begun to wonder is their stock is still on the value menu. But let's be realistic; McDonald's has been through this before. The company isn't going anywhere.

Besides, when compared to Yum! Brand's (NYSE:YUM), McDonald's results haven't been that bad. With the Street fearful of the company's near-term outlook, expectations are low enough for the company to post a solid beat. From my vantage point, this is a perfect opportunity to buy one of the best brands on the market. At around $99 per share and with the stock up 4.5% year to date, these shares won't get any cheaper.

Despite the expected declines, analyst seem broadly positive about McDonald's ahead to Tuesday's report. Analysts are looking for earning per share of $1.24 on revenues of $6.73 billion. This represents year-over-year revenue increase of 2%, while earnings are expected to shed 1.5%. Last year the company reported $1.26 in earnings per share on revenue of $6.61 billion.

The good news is that the entire restaurant industry has enjoyed higher same-store sales in March. This is helping the entire industry to "warm up" to a possibly strong year. Recall, the entire industry blamed the weather for slower restaurant traffic. But recently, restaurant comps climbed almost 0.7%, according to Black Box Intelligence and People Report. This figure is almost 1.5% higher from February's decline of 0.7%.

The other thing to consider is that, although McDonald's struggles is real, this should not be mistaken for the fault of management. The entire consumer discretionary space has not performed up to expectations. And from the recent reports we've seen from Nike (NYSE:NKE) and Coca-Cola (NYSE:KO), it may be a while before normalcy returns to these stocks. And I don't believe anyone will say that Nike and Coca-Cola aren't good companies.

Then there is the exposure in China, which has also hurt McDonald's. Interestingly, both Nike and Coca-Cola have similar exposures. At some point, China struggles, which has also impacted Yum! Brands, will subside. Investor should expect (at that point) better numbers from McDonald's going forward. I bring this up because I'm reading how McDonald's is "getting its lunch stolen" from Chipotle Mexican grill (NYSE:CMG). But these two companies can't be anymore different.

While Chipotle is without a doubt an exceptional growth story, Chipotle does not have the global exposure of a McDonald's. Accordingly, it's a mistake to continue applying the same growth/comp metrics as to suggest how McDonald's is underperforming. From my vantage point, Chipotle (no disrespect) operates with the mentality of a startup operation - albeit a very good one.

For McDonald's, its growth will come. But it won't be at the rate of a Chipotle. And I think it's a mistake to discount McDonald's ability to innovate and come out with new product introductions. For now, it's encouraging that management has embraced the Starbucks (NASDAQ:SBUX) model and place the consumer experience at the center of its service. This is one of the ways McDonald's can boost traffic, while (at the same time) fighting off the rising popularity of Chipotle.

As it stands, while same-store sales growth may not return for several more quarters, I believe in this management team. With the company expecting to return $5 billion to shareholders this year, these shares have been "de-risked." McDonald's stock is still on the value menu. And factoring its strong dividend of 3.2%, this is one of the safest company's in any sector. And that alone makes it a bargain towards the $105 level.

Source: Why McDonald's Is Heading To $105