McDonald's Is Not Expensive Anymore

| About: McDonald's Corporation (MCD)

There is little doubt that McDonald's (NYSE:MCD) is one of the best stocks to own. The company has been well-managed for years, continues to innovate even after so many years, and posts impressive growth all over the world even when the global economy is slowing down. While no one usually questioned the quality of the investment, many people questioned the current valuation of it which is usually a matter of timing.

Just a couple months ago, the stock was trading for $100 per share, giving it a P/E ratio of 19 and dividend yield of 2.8%. Now the stock trades for $86 per share and it is down 14% from its 3-month high price. Now the company's P/E ratio is down to 16 and its dividend yield is up to 3.2%, providing it with a much more attractive price. Of course it can continue to go down from here in the short term, however it should go nowhere but up in the long term.

The company is expected to earn $5.70 per share this year, up 7% from last year's $5.35. In 2013, McDonald's is expected to earn $6.36 per share, up 19% from last year. The forward P/E ratios are 15 for this year and 13 for next year. Because McDonald's continues to grow at a decent rate, it can easily support a P/E ratio near 20. A P/E ratio of 18 would take the company's share price to $102 next year and $115 in 2013.

The company's margins are impressively high, but they may come down a little bit due to inflation in commodity prices. Currently the company's gross margin is 39.59%, operating margin is 31.59% and net profit margin is 20.26%. I wouldn't be surprised if these margins came down by about 1%-2% next year, but this is nothing to worry about.

The global economy will probably continue to slow down for a while. This may pose a threat to McDonald's in the short term, but I am not worried about this either. First, McDonald's doesn't sell heavy/expensive items and second, any issues due to global slowdown will be temporary and long term investors shouldn't really be bothered by short term trends. Also, if the economy continues to slow down, this will reflect negatively to commodity prices, which may actually help margins.

What I find impressive about McDonald's is that the company is able to grow same-store sales as it continues to open new locations every year. Being able to post same-store growth year after year without raising prices while facing slowing economy and rising commodity prices is beyond impressive, and shows me that the company is run by the right people.

In 2012, the company will continue to open many new stores and it will also target same-store sales growth by offering a larger variety of items. The company currently offers breakfast, lunch, dinner, ice cream, snacks, salads, desserts and coffee along with other products. McDonald's' coffee locations face a lot of demand in Europe and the company's ice cream locations face a lot of demand in Asia.

In the US, McDonald's is considered one of the cheapest places to eat at; therefore, the company might even benefit from some of the economic slowdown as opposed to getting hurt. In the developing world, McDonald's is considered a prestigious location, and it can usually charge its clients a premium over other places.

I strongly agree with most analysts who rate the company as a buy. This is one of those companies that should find a place in everyone's portfolio. The company outperforms the market almost every year and it will continue to do so for many years to come.

Disclosure: I am long MCD.