A Fast Food King For Profits Now

Jun. 7.12 | About: McDonald's Corporation (MCD)

by Matthew Smith

McDonald's (NYSE:MCD) ranks among the largest international fast-food chains in the world. The company's current financial standing is strong and the company has managed to widen its competitive moat in the global fast-food industry by introducing a diversified portfolio of products that caters to a global clientele.

McDonald's performance this year is nothing less than remarkable seeing how the stock has exceeded projected sales growth targets. With an impressive rise of 3.3% in global sales in the first fiscal quarter and growth of 4.8% in earnings, McDonald's has comfortably retained its spot as the leader in international fast-food chains.

The stock has attracted many investors lately and is one of the best high-yield low-risk stock investment options today. The company has grown steadily, exceeding projected goals and reporting impressive financial figures in the last three fiscal quarters. Investors have also noticed how the company has amassed a massive free cash flow of $3.8 billion and boosted net income to $5.5 billion from $4.5 billion in 2009.

A major part of the success story of McDonald's revolves around how it has addressed pressing global challenges related to supplies and come out on top. The company recently won the "Best of Sustainable Supply" award for its unfaltering commitment to provide high-quality food and products. As a result, investors are optimistic that the stock will manage to meet its revenue and earnings targets this year.

Furthermore, in a bid to further strengthen its hold on the global market, McDonald's has planned to innovate, devising a range of new products and flavors that will radically redefine its menu. The company recently announced introducing popular flavors like fresh berries and other seasonal fruits to its menu. It will also introduce the new McCafe Cherry Berry Chiller and Blueberry Banana Nut Oatmeal.

McDonald's also plans to introduce the new McCruncher Burger as the latest addition to its value-meal menu. Reasonably priced at $1, the burger is aimed at the middle to low-income market niche that seeks cheap fast-food meals. I strongly believe that this initiative will boost sales growth and revenue margins, resulting in higher yields for investors.

McDonald's has posted a quarterly revenue growth of more than 7% which is remarkable when judged by industry standards. Moreover, sales have grown by 3.8% in the last five years as the company has aggressively expanded its global market share by supersizing its presence in massive markets like China.

However, McDonald's is confronted with certain long-standing and some emerging challenges that could prove to be a decisive force in the stock's movement this year. The most pressing among these is the recent retirement of Jim Skinner, the "super-star" CEO of McDonald's. This retirement news did not go all that well on skeptical investors who instantly expected the stock's performance to slump. This investor skepticism was widespread and well-placed, particularly considering how Skinner was the man behind the huge success of McDonald's over the years.

McDonald's also faces a management crunch and is doing its best to control the situation at hand. However, despite these challenges, it is still financially strong, promising a positive financial outlook. All existing stockholders are holding their positions for now in light of the news that the company's earnings will be announced soon. For now, they can expect to get the same profits and yields as they have been getting for quite some time, which is why they are not rushing their decisions.

Yum! Brands (NYSE:YUM) is a major competitor of McDonald's and secures a massive share of the global market with two of the most popular fast-food brands (KFC, Pizza Hut) operating under its belt. With impressive quarterly growth in sales and revenue, Yum has given McDonald's a tough time in the market after reporting a significant rise of 73% in the first-quarter, particularly spearheaded by a strong sales volume in China. As expected, this overwhelming performance has attracted a lot of positive investor sentiment for the business. Yum is also aggressively pursuing plans to expand its presence in Africa by establishing 100 new KFC stores in seven more countries across Africa. The marketing initiative, which is targeted at the strong growth indicators of the middle class population of the countries, will greatly help Yum in garnering a greater share of the global market. Therefore, I strongly believe that the stock is among the few businesses that continue to pose a serious challenge to McDonald's in the current year.

Domino's Pizza (NYSE:DPZ), an international fast-food chain and retailer, is another major competitor of McDonald's that is banking heavily on its winning recipe. Although the global business has taken initiatives to diversify its product portfolio in an attempt to garnet a greater share of the global market, the overall diversification process has been sluggish, also lacking the innovation demanded by an evolving global market. As a result, the company has largely ensured profits through its heavy reliance on the conventional pizza menu. This has significantly narrowed down the company's competitive moat putting it under burgeoning pressure. McDonald's promises a safer and more lucrative investment owing to its diversified operations and massive global market share.

Wendy's (NASDAQ:WEN) is another safe investment option for investors as it promises stability and relatively low-risk returns. However, returns on investment are considerably low when compared with other major competitors operating in the industry as the stock pays a paltry $0.02 as dividends to investors. As a result, investors targeting high yields have generally shied away from this stock.

Therefore, the bottom line is that a powerful brand such as McDonald's has the potential to remain stable and adapt to evolving market trends. For this reason, I believe that it would be a good option for existing stockholders to hold their position in McDonald's and not consider its competitors for now. Those who are considering buying this stock can be sure of steady earnings and returns in this stock option and for a sustainable future.

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