Wait A Bit And Add Shares Of McDonald's To Your Portfolio

| About: McDonald's Corporation (MCD)

Summary

MCD's well-advertised menu.

MCD is a strong long-term stock holding with a 3.5%+ dividend yield.

MCD shareholders need to be wary about lower than expected same-store sales and country-specific risks in Europe.

Big corporations like McDonald's (NYSE: MCD) have access to a large amount of capital. When you see a McDonald's burger and you are hungry, you feel like buying it and parting with your money. The brand relies on the trust that consumers have. Another thing that helps the brand image is that MCD has several channels for customers to get back at it if the food is not appetizing in certain cases.

MCD has always been performing well when it comes to advertising and promotion with a Super Bowl spot that did the trick this year. It does seem that "a little more lovin' can change a lot". The digital presence has been amped up as well with commercials and promos building on how MCD would accept a new form of payment, latest news and other developments. A new product playbook has been brought in too since the infrastructure of the global giant will be vital to penetrate local markets. After some new chefs getting hired, the food giant launched its own web series "What's Cooking?" on Monday, September 26, 2016.

There has been a big focus on the food ever since Steve Easterbrook was hired as the new CEO in March 2015.

McDonald's Menu

The menu that McDonald's offers is commendable as it appeals to a wide palette. Whether you have a McVeggie, a BigSpicy Chicken Wrap or a Caesar Salad, the restaurant giant has food at reasonable prices that keeps customers coming back for more. A lot of these items can be bought for under $6 and this makes for a good meal whether it is breakfast, lunch or dinner. MCD has become renowned for its breakfast menu with All Day Breakfast becoming a status symbol and giving the restaurant that much desired niche market that boosts profit margins. In prior times, the dollar menu had been one of the big price innovations that was able to get a lot of traffic in to the food store.

Why I enjoy eating at McDonald's

It is interesting to note that only 1 percent of the world's population have had the satisfaction of eating a Big Mac. So I think McDonald's is a concept that can get a wider audience and impressive reach because of its ubiquitous logo introducing more people to the pleasures of its burgers and fries. These sort of things makes a human being think and come up with creative ideas to make a the world a better place. This is the biggest value proposition of MCD, in my opinion.

MCD has solid dividend yield and other robust numbers

For a relatively low risk/solid absolute return, MCD is a strong long-term stock holding with a 3.5%+ dividend yield. MCD looks stellar when it comes to reinvestment and profitability because of the rent/loyalty model that allows for significant company capital contribution and a lot of reinvestment. Low operating leverage brings down earnings risk from revisions to comps/margins. Investors who can wait a year can see a higher stock price due to a fundamental inflection. Additionally, value-creating initiatives on the balance sheet will help boost the stock price.

On the balance sheet side of things, what remains to be seen is how G&A can be reduced. The G&A is currently 2-4x of peers per store and if this value can be brought down there could be a lot of value unlocked for shareholders. A lot of shareholders will talk extensively about the unrealized land value on the 12,000 properties that are globally owned. But it does appear that MCD management has it under control with debt/EBITDA resting at a reasonable 1.4x.

Positive Free Cash Flow

The one thing that is noticeable when looking at MCD from its balance sheet is that it is a high quality stock for investment purposes. The number one thing to draw on is that the FCF is positive. When filtering equities, ensure that the FCF is always positive. This makes it a lot easier.

There are risks to free cash flow. Even with a ~4.5%+ FCF yield, MCD shareholders need to be wary about lower than expected same-store sales, country-specific risks in Europe, unexpected currency headwinds and higher than expected labor and global food cost trends.

Global Economic Spectrum

With the U.S. elections coming up, it is important to focus on how giant corporations have benefited from decades of public research and community infrastructure. These ideas were touched on by the leading economist Thomas Piketty who writes a blog.

The U.S. election is vital because it fields two rather contrasting minds and personalities. Piketty questioned Hillary's ability in the business world in his piece on the 13th of September, but didn't say anything about Mr. Trump. Personally, I feel that Mr. Trump has demonstrated this in his business ventures and real estate enterprises. For MCD, expansion abroad seems like a nice way to grow its business, but the company must keep in mind that it has benefited greatly from lower rates taxation in the United States and Europe in the past.

Conclusion:

In my opinion, the continuity and stability of MCD makes it a good long-term holding. When a brand like MCD has been around for nearly 5 generations, then it is built to last. The trust factor which I have touched on throughout this article has been a top sell for MCD. When you look at the dividend discount model, MCD has an intrinsic value of $89.00. So it would be best to wait a bit and then add some shares of MCD to your portfolio.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MCD over 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.