Don't Get Fried With McDonald's - Barron's

Barron's says that after returning a sizzling 266% over the past five years, McDonald's (MCD) investors might now be overpaying for the company's shares. At 17x 2008 EPS estimates of $3.20, it looks like the Street "has priced in the good news," Edwards Jones analyst Jack Russo says.

Weak consumer confidence may have led to MCD's flat December comps -- the first time same-store sales have failed to climb in nearly five years. In January, sales were up just 1.9%, vs. 3.6% a year ago. February growth of 8.3% was due mostly to an extra day, and price increases.

U.S. traffic growth is slowing, as analysts anticipate an industry-wide deceleration. MCD sees 2.8-3.8% same-store sales growth for 2008, vs. 4.8% the previous three years. European sales are likely to slow. China sales are still strong, but make up less than 3% of its outlets. "If the U.S. business is going to slow, the premium value won't be maintained," Friedman Billings Ramsey analyst Howard Penney says.

Penney is skeptical about McDonald's plan to challenge Starbucks (SBUX) with a new specialty coffee bar; CEO James Skinner counters "the skeptics will be proven wrong." But Skinner admits the company will not be able to pass on food-price increases to the extent it has in the past. Barron's thinks shares will at best lumber along with timid markets until recession fears recede.

Comments

[Dennis Lucey:]

Every time I ask a McDonalds employee about the new coffee bar, they look up, shake their head, and they say, "It's been busy. Very busy." If this success is parlayed not only nationally, but into China, they may scoop SBUX given their strong presence already in place.

2008 Mar 16 12:02 PM

[Barry Dunn:]

Get with the program folks the company is called McDonald's not MacDonald's just the number one most recognized brand in the world

2008 Mar 16 01:06 PM

[SA Editor E...:]

Thanks Barry. Fixed. :-0

2008 Mar 16 01:50 PM

[Larry W:]

The article might have more credibility if you knew how to spell the name of the company correctly.

2008 Mar 16 05:49 PM

[SA Editor E...:]

Thanks Larry. Fixed that one already.

2008 Mar 16 06:00 PM

[No Moss:]

Well, let me see here. The recession is here and McDonald's food is cheap. McDonald's is a huge overseas play and the dollar is cheap. McCafe looks like it's a winner, if not a home run, and coffee is expensive. McDonald's recent deal with China's biggest gas station company will eventually lead to an additional 30,000 Micky Dees in China. Gee, there's uh, uh, about 31,000 MDee's right now, so that's, uh, about 100% growth. China's population growth is still in process, despite the one-child policy, it's urban base is increasing rapidly (and concentrating, i.e., becoming more dense), and the Chinese, if you haven't noticed, have become more prosperous. Can you say explosive growth in Chinese?

Yep, looks like just the right time to sell to me! Can't imagine it selling at that enormous 17x earnings. Short the beast!

2008 Mar 17 03:51 AM

[RPK:]

In the US, McDonald's is generating positive sales growth, whereas most restaurants are struggling to maintain sales. The company's major burger competitors, such as Wendy's, Burger King, and Sonic, are significantly smaller. Some are even exploring strategic alternatives, a euphemism for selling the company. It's other competitors, such as Taco Bell, KFC, Popeye's, etc. do not even compete at the same level. Can one imagine going to these companies for breakfast or coffee.
One to two years ago everyone worried about Starbuck's taking sales from MCD during breakfast. McDonald's proved they can hold their own, in fact they increased sales in the face of competition, and then expanded in to their competitor's core market. SBUX is now canceling some warm breakfast sandwiches and is trying to reinvent their coffee business to generate positive sales and earnings growth.
Internationally, MCD is expanding, and sales are increasing. In addition, the dollar is weak and most likely will not strengthen in the near future.
The time to purchase MCD, however, was at the end of 2002 and early-2003, when it is trading in the teens to low-20s. Since MCD is returning cash to investors by paying down debt, stock buybacks, and dividends, it is a good stock to hold for those that already own it.

2008 Mar 17 07:28 PM

[No Moss:]

Agreed, RPK. Their strategy is to continue to grow the company and to continue to increase the percentage of franchised restaurants, which I believe is around 80%. That gives them larger and larger cash flow, since rental income is offset by depreciation expense (which is non-cash, of course). Cash flow is what they use to feed the stockholders. Net growth in restaurants is fairly small right now, but the deal with Sinopec could change that. Urbanization in China also offers amazing growth potential.

If the coffee thingy is a home run, that's much higher margin than hamburgers. I think it will do OK, probably in non-urban areas where Starbucks are thin on the ground.

2008 Mar 17 09:04 PM

[stoverny:]

McDonalds has the morning market almost all to themselves... no one thinks Burger King or Wendys for breakfast. Their coffee is better than Starbucks (according to Consumer Reports), and much cheaper. During tough economic times people might not want to give up their coffee, but they will go to where it tastes better and is less expensive.

2008 Mar 20 09:39 AM

[User 149310:]

Dear the experts,
I'm a student working on MCD analysis.
I think it's a sell for now.
What do you think?
My e-mail address is [e-mail]
Thanks for your ideas.

2008 Mar 20 10:15 AM