McDonald's: A Strong Buy At $90

| About: McDonald's Corporation (MCD)

McDonald's (NYSE:MCD) operates in the food and beverage industry and therefore its business is virtually guaranteed. McDonald's can rely on guaranteed sales despite the uncertain economic conditions. This is evident from the year 2009 when the global financial crises hit the global economy. However, no business is without its own unique challenges, and McDonald's has experienced this in recent past in its Asia based subsidiary. The company was facing legal challenges with regard to claims that it sold chicken that were past the sell by date. However, it managed to calm things down restoring confidence to the shareholders and the customers.

The Analytical Overview of McDonald's Stock

McDonald's reported a slight improvement in dividend yield realized by investors with a forward annual yield of 2.90% compared to the trailing annual yield of 2.70%. This represented a growth by of 7.4%, increment of $0.18 per share. The company pays dividends at a payout ratio of 48%, a rate that is very manageable. This ensures that the rest of the funds, 52% of earnings is reinvested in the business for growth and expansion into new markets. The direct competitors lag behind in terms of the dividend rate and yield apart from Darden Restaurants (NYSE:DRI), which has a forward annual dividend yield of 3.30% albeit at a lower rate of $1.72 per share as compared to McDonald's $2.80. Additionally, Darden Restaurants' dividend yield declined from the previous 3.50% by 5.7%. Yum! Brands (NYSE:YUM) on the other hand reported an unchanged 1.60% forward annual dividend yield despite the increase in dividend rate from $1.11 to $1.14 per share. Starbucks (NASDAQ:SBUX) could only manage a forward annual yield of 1.10% having improved from a trailing yield of 0.10% while Brinker International (NYSE:EAT) had 2.30% forward annual yield at a low rate of only $0.64 per share.

The food and beverage industry is not one of the most profitable industries and this is very clear from the profitability margins reported by competitors of McDonald's for the last financial year. However, McDonald's reported a profit margin of 20.38% and an operating margin of 30.71%. This explains the reason behind the $2.80 dividend per share at only 48% payout. Not all companies in this industry were as profitable though. Darden Restaurants could only deliver 5.80% profit margin and an operating margin of 9.07% to its esteemed investors while Yum! Brands did just better with a profit margin of 10.45% and an operating margin of 15.76%. The lowest performance was reported by Brinker International with a profit margin of 5.08% and an operating margin of 8.14% whereas Starbucks emerged the second best with a 10.51% profit margin but with a lower operating margin of 12.98% as compared to that of Yum!

McDonald's quarterly earnings growth of 10.80% eclipses the quarterly revenue growth of 9.80% year on year as reported. This indicates an increased efficiency in managing cost something that could spell increased returns in the future. The only company to outperform McDonald's in this respect is Yum! Brands. It has a quarterly year on year revenue growth of 15.40% with a respective quarterly earnings growth of 29.90% which is almost double the revenue growth rate. The other competitors' performance is quite dismal as Darden Restaurants could only manage a quarterly revenue growth rate of 6.10%, which resulted into 27.90% earnings growth for the same period. Brinker International had an equally poor performance reporting a revenue growth rate of 1.50% and earnings growth rate of -4.80% while Starbucks managed to report better results than McDonald's marginally with a revenue growth rate of 16.40% and earnings growth rate of 10.20%, but still with a clear indication that there was no improvement in managing cost.

Recent Challenges in Asia

Just as I mentioned in the beginning, the food and beverage industry is very sensitive especially now that the sole source of income comes from human consumption, which means extra care is required to avoid such things as food poisoning. Recent news from Asia has it that McDonald's was accused of selling products whose sell by date as formally referenced in all products had passed. This brought about a lot of criticism of the company with regard to the seriousness placed on its customers' welfare. However, one fact that did not come out clear was, whether this had any truth in it or was just an unjustifiable allegation. Keeping in mind the impact this could have on the company's reputation, McDonald's went ahead and issued a public apology in regard to the accusations albeit without clear submission to the default. Just as the majority of you did not get to know this, so is the impact to the stock price. During this period, the stock price remained repulsive to the news with no major fluctuations.

The company filed form 8-K in March 26th with Thomson being promoted along with a salary increment of 26%. This should act as a boost and further motivation to take McDonald's to new heights, which in turn will trickle down to the smallest of all shareholders. With this in mind, there is every reason that the company will continue doing well.

I Hereby Recommend

Taking into account the above information, I expect that the stock will experience a rally in the near future. As a 'buy low sell high' investor, I believe it is the right time to buy this stock.

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

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