We're Huge Fans Of McDonald's... Just Waiting For An Entry Point

Oct.26.11 | About: McDonald's Corporation (MCD)

Another quarter is in the books for McDonald’s (NYSE:MCD), and the company has posted yet another blowout quarter. McDonald’s continues to execute well on all fronts. After reassessing our short-term assumptions, we think the firm is fairly valued in the high-$80s per share.

Earnings per share surged 12% to $1.45, which blew past every estimate on the street. Margins came in higher than expected, as commodity prices fell off a cliff during the quarter, and incremental revenue gains were much higher than expected. However, with the company hedged, they were unable to experience the full extent of these cost savings.

Also on the income side, McDonald’s continues to roll out new drink offerings in all of its markets, which drive not only new traffic, but also contributed to margin expansion. Additionally, earnings were boosted in both Europe and Asia by positive currency effects. Currency neutral income was up only 6%. We'll be watching closely for any reversals in currency, and its impact on the firm's fourth-quarter results.

CEO Jim Skinner cited excellent results from adding an additional four new sauces for Chicken McNuggets in the US, as well as the 1955 in the UK, and the Chicken and Cheese snack in Australia as some of the drivers of the impressive same store sales figures. However, management did warn that a lot of remodel projects in the United States were delayed during the summer, so franchisee restaurants could experience some weakness at the beginning of this quarter.

In spite of economic uncertainty, the combination of offering customers great value and new products helped boost same-store sales in Europe 4.9%. Unlike competitor Yum Brands (NYSE:YUM), which mentioned that they were experiencing some weakness in China, Skinner seemed encouraged that the company has maintained sales traction in China, and is still on pace to open new stores throughout 2012 and beyond.

Valuentum remains bullish on the US economy, and we think 2012 will be another great year for McDonald’s, as they will be able to raise prices in their largest markets, while experiencing gains from decreased commodity pricing. Furthermore, we think a potentially slowing Chinese economy doesn’t alter the long-term, fast-serve secular growth story in the emerging world. Any short-term hiccups are overshadowed by the long-term shifts in wealth, diets, and lifestyles.

With an increased dividend and overall dedication to returning cash to shareholders, we think McDonald’s, though fairly valued, is an excellent candidate for long-term dividend investors’ portfolios--it also has a 3% + dividend yield. Even during the market’s wild swings, it has been relatively stable and seems protected from substantial downside risks and volatility. We'd love to add McDonald's to our Best Ideas portfolio, but its valuation is a bit too steep.

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