It's always hard to sell stocks that have been great long-term investments. Companies that have consistently produced significant gains and grown dividends over many decades are often the core of many traders and investors portfolio.
This could not be more true for any company than McDonald's (MCD), a company that refocused its business model after having difficulty with anti-cholesterol and obesity campaigns, and has consistently grown at double digits over the last decade.
Still, while McDonald's has outperformed the S&P 500, and its tracking exchange traded fund, SPY, by a fairly wide margin over the last decade, the company has consistently underperformed most of the broader indexes by a wide margin over the last six months.
McDonald's has been a great long-term investment, and few major company's other than IBM, Apple (AAPL), and some of th stronger performing consumer staple company's such as Altria (MO) and Kimberly-Clark (KMB), have been better performing stocks over the last 10 years.
McDonald's trades at around 17x trailing earnings, and 15x forward earnings. McDonald's has grown at 10-12% a year over the last several years, so the company's growth multiple has been justifiable since the management has been able to maintain the impressive growth rate even in a weak environment, and the company has consistently raised the dividend as well.
The problem for McDonald's today is that the company gets nearly 38% of its revenues from the Euro-Zone, and the company's business model in Europe is significant different than the fast food model the company has built in the U.S. and most emerging markets. McDonald's European business is more of a casual dining business that sells at the $10-15 dollar price level.
Well, certainly, McDonald's has continually shown strong growth and market share gains over the last several years even as the Euro-Zone has remained weak, McDonald's recent same store sales growth in the this troubled economic region slowed dramatically in recent months, with same stores sales numbers coming in at around 2.5%, while analysts were expecting same store sales growth closer to 5-5.5%. McDonald's same store sales growth was below expectations in the U.S., the Middle East, and Asia, with the company posting negative same store sales growth in the Middle East and Asia.
McDonald's has consistently grown its business in the Euro-Zone despite the weakness in Europe by taking market share, and the significant slow down in the company's European sales growth likely indicates that McDonald's market share gains in this region moving forward will be limited. Obviously, because the company does nearly 40% of its business in the Euro-Zone, the company is significantly exposed to forex moves as well.
McDonald's disappointing European sales number are especially important because this is where most companies' strongest recent growth has come from. While this strong American brand has been successful in Asia and many other regions, KFC outnumbers McDonald's 10-1 in Asia, and McDonald's hamburger based menu has not been as popular in India and China as as YUM brands (YUM) taco and chicken based menus.
To conclude, while McDonald's market share gains and growth in the U.S. and Europe have been strong over the last several years, the company's growth in Asia has lagged its competitors. With Burger King bankrupt and Wendy's struggling, and consumer spending in the Euro-Zone slowing significantly, it's likely McDonald's growth prospects will be limited near-term. Well McDonald's currently trades at a growth multiple because of the company's consistent double digit growth, McDonald's recent European sales suggest the company's market share gains in this troubled region are likely topping out, and economic activity in the Euro-Zone continues to weaken significantly. If McDonald's growth slows to 7-8% the company will likely trades at 10-12x average estimates for next years earnings, the stock price could fall significantly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.