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In this article I take a look at McDonald's (MCD), Yum! Brands (YUM), and Green Mountain Coffee Roasters (GMCR). We'll use management effectiveness ratios, book value-share, price-sales, and price-book value, among others, to evaluate.

Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.

European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, and Spain's banks are recapitalized, sovereign risks remain.

Further, there is a chance that housing prices in the United Kingdom and France will decline. Unlike U.S. housing prices, home prices in the U.K. and France did not decline substantially during the Great Recession. Income may not have grown enough to sustain the current level of housing prices. Therefore, it is possible that the global financial system could face risks stemming from a decline in home values in two of the world's largest economies.

McDonald's - Sell

Investors should distribute shares of McDonald's on valuation. The macro-economic risks, from potential fiscal consolidation in the U.S. and European Union, could cause valuations to decline farther. Some investors may want to protect long positions by buying put or selling call options.

Operating income-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.

According to the firm's financial statements, current assets decreased 3.3 percent in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is just over 2. Further, cash declined by roughly 2 percent compared to the fourth quarter of 2011.

Total revenue in the first quarter, compared to the year-ago quarter, increased 7.1 percent while operating income increased 7.6 percent. Operating income grew faster than revenue, a sign of excellent management of operations. However, net income grew 4.7 percent as income taxes paid increased.

In the first quarter of 2012 earnings were high quality. Additionally, cash from operations wasn't enough to cover cash used in investing and financing. The cash balance decreased $46.6M in the first quarter of 2012 because of dividend payments and stock purchases.

The fair value of the firm's debt obligations was estimated at $14.4B as of March 31, 2012.

The European segment reported operating income growth, compared to last year, of 3.5 percent. Growth was driven by stronger sales in the U.K., Russia, and Germany.

Also, the firm expects interest expense to increase 8-10 percent in 2012. Higher average debt balances are driving growth in interest expense.

Additionally, higher corn prices could increase costs of sales and decrease gross margin as meat and beverage prices increase. Further, the firm may not be able to initially pass higher cost on to consumers as consumer confidence remains weak.

Company v. Industry

  • Return on Assets: 17 v. 9.60
  • Return on Investment: 19.34 v. 13.59
  • Return on Equity: 38.20 v. 18.13


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Operating income-share is increasing; the increase in operating income-share is bullish.


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Shares of McDonald's are trading above the declining 50-day moving average. The stock price is breaking out to the upside after forming a base. McDonald's could trade back towards the $100 level before running into supply.


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Price-sales has declined from its recent peak. The valuation metric is expected to continue to decline.


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Yum! Brands -- SELL

Investors should distribute shares of Yum on valuation and the macro-economic outlook. The macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline further. Additionally, the U.S. economy is forecasted, by me, to be in a recession in 2013 or 2014. Some investors may want to protect long positions by buying put or selling call options.

Book value-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.

Company Performance

According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is roughly 4.

Total revenue in the first quarter, compared to the year-ago quarter, increased 13.1 percent. Operating profit increased 61 percent and net income increased 73 percent. The increase in operating margin and profit margin are bullish for shares of Yum! Brands.

In the first quarter of 2012, earnings were high quality. Additionally, cash from operations wasn't enough to cover cash used in investing and financing. The firm spent $540M on acquisitions and $131M on dividends to share holders. Further, capital spending was $184M in the first quarter of 2012.

The $540M acquisition was of Little Sheep Group Limited. Yum! Brands now owns 93 percent of Little Sheep Group Limited. The acquisition will boost the firm's presence in China.

Revenue from China in the first quarter of 2012 compared to the year-ago quarter grew 34 percent. While revenue from the U.S. decreased 6 percent. Revenue from the remainder of international operations excluding China and India grew 8.4 percent.

The firm is involved in class action lawsuits with employees claiming unsatisfactory working conditions and re-numeration. The lawsuits probably won't have a long-term material impact.

The company attempts to maintain a dividend payout ratio of 35-40 percent of net income. And has increased the quarterly dividend at a double digit rate each year since inception in 2004.

Company v. Industry

  • Return on Assets: 17.21 v. 9.85
  • Return on Investment: 23.75 v. 14.00
  • Return on Equity: 77.10 v. 18.69


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Book value-share is increasing; the increase is bullish.


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The share price is rising and is currently coming off of a recent high.


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Price-sales is rising and is currently coming off of a recent high.


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Price-book value is rising and is currently coming off of a recent high.

Green Mountain Coffee Roasters -- Neutral

Investors shouldn't accumulate shares of Green Mountain Coffee Roasters as shares are in a secular bear market and valuations are misleading. However, book value-share and revenue-share increased over the last few quarters and management is effective based on the management effectiveness ratios.

According to the firm's financial statements, current assets increased 1.8 percent in the first quarter of this year compared to the third quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is roughly 1.5.

Total revenue in the first quarter, compared to the year-ago quarter, increased 36.7 percent. Operating income increased 25 percent. Net income increased 42 percent.

In the first quarter of 2012, earnings were high quality. Additionally, cash from operations was enough to cover cash used in investing and financing.

The Specialty Coffee business unit's pre-tax margin was 24 percent in the first quarter of 2012; the Keurig business unit's pre-tax margin was 14.4 percent; the Canadian business unit's pre-tax margin was 8.3 percent.

Total fixed assets less accumulated depreciation increased from $579M to $793M between the third quarter of 2011 and the first quarter of 2012. The increase is mostly attributable to an increase in production equipment.

The Company and certain of its officers and directors are currently subject to two putative securities fraud class actions and two putative stockholder derivative actions.

I may change my rating on Green Mountain to "buy" once the investor base changes from growth to value oriented.

Company v. Industry

  • Return on Assets: 11.06 v. 7.55
  • Return on Investment: 12.90 v. 14.39
  • Return on Equity: 20.61 v. 21.89


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Book value-share is increasing; the increase is considered bullish.


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The price of common equity shares is declining; the decline in share price is secular.


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Price-sales is declining; the decline is mostly caused by a decline in share price. I do not consider this stock undervalued as the long-term trend is down.


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The price-book value ratio is declining; the decline is mostly caused by a decline in share price.

Macro Environment

U.S. GDP Forecast

Baseline Alternative Baseline Adverse
2012 +2.3 +1.8 +1.8
2013 -0.5 -1.5 +1.5
2014 +2.4 +1.6 -0.5

In the baseline scenario, I see economic growth continuing through 2012 with a recession in 2013 and economic growth resuming in 2014. Under the alternative baseline scenario, economic growth this year is slower than the baseline scenario and the recession in 2013 is deeper. In the adverse scenario, the recession occurs in 2014. Under the baseline and alternative baseline scenarios, U.S. equities are in a bear market during 2012 and/or 2013.

The economic growth model assumes fiscal consolidation occurs in the U.S. and/or the recession in Europe is deeper than currently forecasted. Also, we could see a spike in the price of oil on Iran risks.


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ISM non-manufacturing PMI is declining; the index is expected to continue to decline in the coming months.


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Non-farm employment change is declining; the pace of job growth is expected to continue to slow.


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CB consumer confidence is starting to decline; the index is expected to decline in the coming months.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.

Source: 2 Sells And A Neutral