McDonald's: A Value Play In The Growing Fast Food Industry

| About: McDonald's Corporation (MCD)

The fast food industry is presently valued in the billions of dollars with annual sales grossing to over $160 billion. With over 300,000 fast food units in the United States alone, this industry has been on an accelerated growth through the years since the major players have also embarked on a mission to expand its reach to other countries across the globe.

One of the biggest heavyweights in the fast food industry has been the McDonald's (NYSE:MCD) franchise, which has recorded sales of over $31 million in the past years. McDonald's was created in the 1940s, but was later transformed into a franchise around 1955 and has ever since grown to serve an estimated 68 million customers on a daily basis in over one hundred countries. McDonald's currently enjoys a stable lead over competitors such as Domino's Pizza (NYSE:DPZ), Kraft Foods (KFT), Wendy's (NYSE:WEN) and Yum! Brands (NYSE:YUM).

This can be attributed to the fact that McDonald's holds a steady market capitalization of about $97.45 billion while closely followed by Kraft foods at $69 billion. Yum! Brands and Wendy's trail at $33.62 billion and $1.89 billion, respectively.

Fast Food, Stable Investment

McDonald's has been trading around $96 in recent sessions, after dropping slightly from last week. As compared to its main competitors, McDonald's seems to be doing extremely well, with Yum! recording nearly a 3% drop in its share price, while Wendy's has recorded a 1% overall drop in its stock price.

McDonald's has proven to gain the upper hand on its competitors time and time again in that it has taken the initiative to fill the void left by its rivals drawing out from different regions as in the case of Wendy's. The move by Wendy's to withdraw from a number of profitable locations such as Hong Kong and the United Kingdom means that McDonald's will be able to enjoy a monopoly of sorts which has further resulted in the increase in its annual revenues.

However, Yum! has been playing catch up as it continues its expansion endeavors into China and Pakistan in the Middle East. An estimated $5 billion went into the Chinese expansion which eventually proved to be extremely profitable after its approval by the Chinese government.

Nothing quite like a McCourtCase

In a long string of court cases that have plagued McDonald's road to fast food supremacy, it has emerged victorious in a recent litigation suit. The plaintiffs claimed that McDonald's had been using underhanded tactics with the provision of happy meals in order to attract more children. The suit stated that the fast food giant handed out toys to children with every purchase of a happy meal which further enticed them. The lawsuit was intended to make McDonald's stop handing out the toys to children as long as the meals did not meet a specific dietary constitution. The San Francisco judge however dismissed the case with prejudice which resulted to another great win for McDonald's and a show of effectiveness from its litigation department. Shares still remained unaffected which was proof enough that shareholders were more than confident about McDonald's capabilities in terms of handling all future crises.

In an attempt to strengthen the lead over its competitors, McDonald's took the initiative to expand through the $174 million Boston market acquisition several years ago. This proved to be an extremely wise decision as the total revenue was estimated to have increased to over $27 billion. The share price of McDonald's stock also showed a corresponding increase after the closure of the deal. Along with having an increase in the number of stores that would be added to the long list of McDonald's chains, it also benefited to the addition to its real estate portfolio which marked an increase in its total assets.

For skeptics that may be cynical about the growth of McDonald's over the next few years, their worries should be dismissed after keenly looking at the price to earnings growth ratio for the next five years. Projections show a 1.70 PEG ratio for McDonald's in contrast to 1.63 and 1.29 for main rivals, Kraft and Wendy's.

However, predictions made by investors warn that current shareholders should not get too comfortable and should brace for tough times ahead. This is due to the fact that Burger King, a privately held fast food chain is intent on going public, which will no doubt bring stiffer competition to McDonald's. Regardless of the fact that McDonald's share price has been fluctuating for the last year reaching highs of $102.22 and lows of $77.52, I still remain convinced that this is the stock to back. It simply bears infinite potential.

With the changing trends in the fast food industry that demand for better quality in terms of the food availed, McDonald's has had to spend more in order to ensure customer satisfaction. By also taking up various green initiatives, it has effectively drawn in more and more consumers who have contributed to an increase in its market cap. In conclusion, the fast food industry is projected to increase by no less than 4% yearly and standing behind McDonald's would be a wise choice -- a choice typical to a canny investor.

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