McDonald’s (MCD) is a classic example of how it takes a dedicated management team to change with the times and reinvent a company when necessary.
Obviously the company grew robustly in the 1970’s and 1980’s, but hit a wall in the ‘90’s and earlier this decade. Its menu got stale and it didn’t pay attention to its customers enough. Complacency is a killer in the restaurant business and Mickey D’s suffered from it.
Then, it vowed to make customer satisfaction a priority and also tweaked its menu by catering to a more health-conscious group. Its Chicken Selects have been a hit as the public has craved the health benefits of white meat. The results have been outstanding. Same-store sales have accelerated over the past several quarters into the mid single-digits, no small feat for a company of its size, and earnings growth has accelerated.
We think the good times can continue to roll over the next year or so. Management has shown that returning to cash to shareholders is a priority, which is much appreciated by investors. Its 2.5% dividend yield is much better than that of the market as a whole. This will appeal to many conservative investors.
The shares aren’t “cheap” in the deep value sense, but aren’t overvalued either. MCD is changing hands at around 17.3x next year’s estimates. Nine of the 14 covering analysts have raised their forecasts over the past month.
We believe the The Correct Call is for conservative investors buy shares here for a one-year holding period, with the expectation of making between 10-15%. The nice dividend payout will provide comfort in these rocky times as well.