Social unrest overseas is distressing enough, but for investors in the shares of McDonald's (MCD), anti-American sentiment is especially distressing. The iconic American burger flipper embarked on a global expansion campaign a long time ago and has benefited by entering new markets overseas. However, today, it is realizing one risk in doing so. If there ever was a brand associated with America, it's McDonald's, and so at best, it should see less customer traffic because of the latest protests against America, and at worst, the physical destruction of some of its restaurants. This is a topic not often discussed, but worth noting for investors in MCD today.
Over recent days, we have watched Pakistani protestors angered over a low-quality otherwise never seen video, burn a theater to the ground. They did so, presumably, because the theater showed popular western films, and so was associated with Hollywood and America. If foreigners could be so incensed as to burn to the ground a business owned and operated by their own brethren because of one product it sold, imagine what they could do to stores with colorful signs calling attention to iconic American brands (and they have).
McDonalds is the leading global foodservice retailer with more than 33,500 local restaurants in 119 countries. Just 32% of the company's revenues are generated from U.S. operations, with 40% generated from European business. Its operations in Asia/Pacific, Middle East & Africa (APMEA), the hot spot I'm speaking of today, account for 22% of the company's total revenues. Considering how widespread protests have been, whatever percentage of popular opinion they may represent, we could say 22% of the company's revenue may be at risk of disruption. Obviously, risk of disruption and realization of it are two different things, but the stock may not be reflecting today the business environment in APMEA tomorrow.
That environment could be much different. The newly elected leader of Egypt has called for Sharia law in past speeches, calling it the constitution of Egypt. What does this mean for American interests? That's a question perhaps for another blog and another issue, but it is clear that the environment may be changing for American businesses in some parts of the world. It is likewise clear that the protests on the streets of the region do threaten the outposts of American franchises.
McDonald's has not yet reported any impact to its results. In fact, on September 11th it reported a solid global comparable store sales increase of 3.7% for August. Sales in struggling Europe were up 3.1%, which was better than the 3.0% gain made in the mature U.S. market. But in the burning regions of the APMEA, sales climbed by 5.7% in August. Obviously, much of this growth is coming from China/Asia Pacific, but some is also coming from the rest of the segment. I'm reminding you that this August data reached the wire before the latest protests began; in fact, the attack on the American Embassy in Libya came on September 11th.
On September 21, protests across the Middle East and Africa raised police presence around U.S. embassies and also called attention to American branded businesses. A McDonald's location was forced to close in Indonesia and others were threatened across the Muslim world as indiscriminate protesters lashed out wildly. The risk is real and should rise if this latest uprising escalates. Considering a war with Iran looms as a strong possibility, and one in which the response of the people and even some nations across the region would be difficult to predict, this risk should be incorporated into the valuation of McDonald's and companies like it today.
Starbucks (SBUX), Yum! Brands (YUM), Wal-Mart (WMT) and even Apple (AAPL) are some of the names which might be threatened in one way or another, though the damage possible to the electronics maker is obviously much lower. It was only three months ago when I authored the article, 5 American Stocks Leading the World about these five companies. Yet, just as America is threatened today, so are these global leaders. Some will say this is an exaggeration, and based on history it probably would be. However, there is a profound change occurring across the Middle East and Africa, which has unique characteristics, and can result in dynamic changes to the operation of business.
Chart by Yahoo Finance
McDonald's share performance has reflected weakness in Europe more than anything else, and actually reflects recovery from that in September on the latest efforts of the ECB. I believe its recovery will be stunted here though, on the latest upheaval. The company could warn of the impact of these widespread protests over the weeks ahead, and so investors may begin to hedge against that possibility today. At 16.4X my estimate for the next 12 months ($5.69 - based on average of consensus for 2012 and 2013), the stock trades ahead of the 10% growth projected by the consensus for 2013 and 9.2% view for the next five years. The PEG ratio is 1.8 on that long-term growth forecast, which would be high. However, the stock also offers a 3.3% dividend yield, which if we add to the capital appreciation opportunity (or the EPS growth), we can adjust the PEG ratio to 1.3, which is much more digestible. Still, given my expectations for continued weakness in Europe, new weakness in the U.S., and disruption in the APMEA region, I would reduce MCD exposure here (sell).