Shares of McDonald's (MCD) ended the week 1% lower after releasing a strong earnings report on Friday.
First Quarter Results
The world's largest restaurant chain operator reported a 5% increase in net profits to $1.27 billion. Earnings per share came in at $1.23 vs. $1.15 in the first quarter of 2011, while revenues increased 7.1% to $6.55 billion. Both earnings and revenues are in line with analysts estimates. Comparable-store sales increased 7.3% vs. analyst expectations of 6.7%
McDonald's' new CEO Thompson will focus on new and limited-time items such as McCafe and fruit smoothies. Before being appointed as the new CEO Thompson was responsible for the successful roll-out of McCafe. Analysts point out that McDonald's is gaining market share with the introduction of its breakfast menu and the fact that it has cleaner and more modern restaurants.
McDonald's reported the strongest sales growth in the US where sales rose an impressive 8.9%. Growth in Asia, Middle-East and Africa grew 5.5% which was a little disappointing and growth in Europe came in at 5.0% driven by a strong performance in the UK and Russia. Severe weather in February had negative impact on European sales which beat analyst estimates of 4.2% growth.
Outlook
The company warned that same-store sales growth in April will slow down to 4%. It looks to open 1,300 new stores vs. 1,150 stores last year and it will spend another $1.45 billion to remodel 2,400 of its 33,500 worldwide locations. The company did not specify revenue or growth targets for its fiscal year of 2012.
Valuation
The company ended its fiscal year of 2011 with $2.3 billion in cash and operated with $12.5 billion in both short and long term debt for a net debt position of $10.2 billion. The market values McDonald's at some $97 billion which values the firm at 3.6 times annual revenues and about 17 times 2011's annual earnings. This compares to a multiple of 2.7 times annual revenues and 19 times earnings for competitors Yum! Brands (YUM).
Furthermore the company pays a $0.70 quarterly dividend for an annual dividend yield of 2.9%
Investment Thesis
Shareholders in McDonald's have seen their investment double in a time frame of five years, but year to date shares have lost some 4% as investors are worried about the impact of the European sovereign debt crisis on the results, as well as the fear that the CEO transition from retiring CEO Skinner to the new chief Thomson is not going completely smoothly.
Based on projected 2012 revenues of $30 billion and profits of $6 billion McDonald's trades at 3.2 times estimated annual revenues and 16 times 2012's earnings. The company which is a truly globally diversified company, with a much more diversified menu is a stable bet on the faith of the world economy.
Furthermore the company pays a fat 2.9% dividend yield. It has paid a dividend for decades without interruptions which makes McDonald's a good addition for any global diversified investment portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
