Although investors typically focus on fundamentals or technical analysis when assessing investments for their portfolios, the 4th of July holiday provides an opportunity for investors to focus to some degree on sentimentality and a desire to support businesses that instill patriotism. There may even be a basis for patriotic stocks to outperform the broader market, at least during times of global conflict.
This is the second of three articles recommending companies that reflect patriotism in the United States. Each of the series of 3 articles articulates an alternative method of assessing patriotism. The first article focused on United States based global industrial leaders that are key exporters to the world. Article 2 today identifies patriotic companies that are transformative global consumer brands. Article 3 identifies patriotic firms that have chosen at great pains to manufacture in the United States despite opportunities to do so cheaper abroad.
One method for establishing patriotism in firms is the way in which United States-based firms develop and are perceived internationally. This is particularly important for consumer brands, which are increasingly expanding internationally to take advantage of new markets and growth opportunities in developing economies. McDonald's (NYSE:MCD) and Coca-Cola (NYSE:KO) have aggressively expanded their brand and businesses internationally, and each is a company closely identified with the United States throughout the world.
McDonald's is a global leader in quick service restaurants, with over 35,000 restaurants in 119 countries worldwide. McDonald's has long been a cultural icon in the United States, growing in the latter half of the 20th century into the largest restaurant chain in the United States. It expanded internationally relatively early in its development, with a location in Canada in 1967. McDonald's is so recognized as an American brand that The Economist has utilized a Big Mac Index to illustrate global exchange rates in an easily-recognizable fashion for the general public.
The investing case for McDonald's today rests strongly with the same factors that have made it a quintessentially American company in a globalized economy. The brand value of McDonald's is global, with Interbrand assessing McDonald's as the world's sixth most valuable brand in 2011. Having largely exhausted market opportunities in the United States, global brand equity holds key to McDonald's continuing their impressive growth. Capitalizing on global growth has supercharged McDonald's earnings and share price since the lows of January 2003. McDonald's has grown in terms of revenue from $17 billion in 2003 to $27 billion in 2011 and earnings have grown fourfold from $1.14 to $5.35 per share. Investors have been richly rewarded with share price gains from $13 to $88 over the 2003-2011 period.
The extent to which McDonald's has relied and will continue to rely on international expansion to generate growth is best illustrated by the share of total revenue accounted for by geographical regions. McDonald's in 2011 generated 32% of sales from the United States, below the 40% generated in Europe. Asia/Africa/Middle East generated 22% and other countries accounted for 6%. The difference in growth rates between the United States and the rest of the world for McDonald's are staggering. McDonald's saw double-digit increases for each of the geographic regions (excepting Europe, with slight growth from 2009-2010) other than the United States in both the 2009-2010 and 2010-2011 time frames while the United States saw 2% and 5% growth respectively.
The recent turmoil in Europe has certainly caused McDonald's stock to fall over the past few months from 102 in March to 88 today. The fundamentals suggest that McDonald's is fairly valued at present levels, however. Although there are international opportunities, McDonald's trades at 15 times earnings, which is in line with their historical growth rates. Perhaps the most negative element of the company is the overhang of debt, which has grown to over $12 billion, dwarfing their cash position. While historically low interest rates have enticed many firms like McDonald's to borrow heavily to fund expansion, McDonald's have borrowed to the point where earnings are significantly impacted by sizeable interest expenses, nearly 10% of net income. This overhang may slow the growth of future dividends and keep a lid on the share price for this patriotic company for the intermediate term.
Coca-Cola is another global consumer brand that is emblematic of American culture. Coca-Cola, founded in 1886, is the world leader in soft drinks, with revenue of $46 billion in 2011. Coca-Cola has worked hard to establish a patriotic brand, dating back to World War II when the CEO of the company decreed that United States military service members would only pay the "home" rate of 5 cents per bottle anywhere in the world. This support of the troops was in reaction to the demand of General Eisenhower that Coca-Cola be globally available to troops as a morale booster, which speaks to how important and emblematic of a brand Coca-Cola had become by World War II. Coca-Cola parlayed those initiatives during World War II into an early expansion of the brand globally, which has had a lasting effect on brand perception across the world. Interbrands tabs Coca-Cola as the world's leading brand in 2011. Global expansion and marketing have produced this high level of recognition worldwide, and Coca-Cola is now available in over 200 countries.
From an investment perspective, Coca-Cola appears fairly valued for investors. While the scale economies of selling concentrates has allowed Coca-Cola to generate operating margins of 23% and free cash flows of $7 billion annually, the company sports a price-trailing earnings ratio of just over 20, and a price-earnings-growth ratio of 2.5. While revenue growth was impressive during the past five years, sequential earnings over the past three quarters has turned negative and Coca-Cola will struggle to generate growth rates over 10 percent in the future, which would be required to justify the existing multiples. On the other hand, an emblematic American company and the world's leading brand has tremendous long-term prospects and a "competitive moat" that has made Coca-Cola a core holding of Warren Buffet's Berkshire Hathaway for a number of years. As you sit back and enjoy a Coca-Cola this 4th of July, consider the potential benefits (in the form of "goodwill") of adding some patriotism to your portfolio.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.