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Shares of McDonald's Corporation (MCD) fell 4.5% in Friday's trading session. The fast food restaurant operator reported its third quarter results before the market open on Friday. Increased competition, a tough economic environment, and a strong US dollar impacted the results.

Third Quarter Results

McDonald's reported third quarter revenues of $7.15 billion, roughly unchanged compared to last year. In constant currencies, revenues rose 4% on the year. Revenues came in line with analysts expectations of $7.14 billion.

The company reported a 4% decline in operating income to $2.29 billion. In constant currencies, operating earnings came in unchanged. Operating margins fell 140 basis points to 32.0%, as a result of competitive pressures.

Net income fell 3% to $1.45 billion. As a result of share repurchases, earnings per share fell just 1% to $1.43 per diluted share. The strength of the dollar against other major currencies impacted earnings by $0.08 per share. Earnings missed analysts consensus of $1.47 per share.

Global comparable same store sales growth came in at 1.9% in local currencies, a slowdown compared to previous quarters. Same store sales growth fell short of analysts consensus of 2.4%.

CEO Don Thompson commented on the results:

"While our sales momentum and current financial results reflect today's challenging conditions, we continue to see significant long-term opportunities for brand McDonald's and remain confident in the underlying strength of our business model. We expect near-term top- and bottom-line growth to remain pressured as we focus on driving guest traffic and market share by leveraging our strategies and competitive advantages in response to the global economic, operating and competitive challenges. As we begin fourth quarter, October's global comparable sales are currently trending negative."

Segmental Information

The US division reported same store sales growth of 1.2% for the quarter as competition increased. Beverages, breakfast and menu classics continued to perform well. Operating earnings for the US division fell 1% on the year.

Europe performed relatively well. European comparable sales growth came in at 1.8%, as the company gained market share, despite negative traffic growth. Operating income fell 7%, but was up 3% in constant currencies. Strength in Russia, the UK and France was offset by weakness in Germany.

The Asia/Pacific, Middle East and Africa division reported a 1.4% increase in comparable sales. Operating income rose 3%, and was also up 4% in constant currencies. Solid performance in Australia and China was offset in Japan and some other markets.

Valuation

McDonald's did not provide a balance sheet statement for the third quarter yet. The firm ended its second quarter with $2.5 billion in cash and equivalents. The company operates with $13.6 billion in short- and long-term debt, for a net debt position of $11.1 billion.

For the first nine months of 2012, McDonald's generated revenues of $20.6 billion. The company reported a net income of $4.1 billion, or $3.98 per diluted share. At this rate, the company is on track to report revenues of $27-$28 billion. Net income could come in at $5.5 billion, or $5.50 per diluted share.

After a 4.5% decline on Friday, the market values the firm at $89.5 billion. This values McDonald's at 3.3 times annual revenues and 16 times annual earnings.

Currently, McDonald's pays a quarterly dividend of $0.77 per share, for an annual dividend yield of 3.5%.

Investment Thesis

Year to date, shares of McDonald's have fallen some 12%. Shares started the year at $102 per share. Shares fell to lows of $86 in the beginning of the summer, and have traded around $90 since. Shares are currently exchanging hands at $89 per share.

Over the past five years, shares have risen some 55%. Shares traded around $50-$60 in 2008 and 2009, and steadily rose to highs of $102 in the beginning of the year. Between 2008 and 2012, McDonald's grew its annual revenues from $23.5 billion in 2008, to an expected $27.5 billion in 2012. Earnings rose from $4.3 billion in 2008, to an expected $5.5 billion this year. Earnings per share rose from $3.76 in 2008, to an expected $5.50 in 2012, as the company retired over 10% of its shares outstanding since 2008.

CEO Don Thompson, who took office in July, has a tough task ahead. Economic uncertainty, caused by the discussions about the fiscal cliff, is impacting many businesses in the third quarter. McDonald's is not the first company to miss this earnings season.

Thursday, Chipotle Mexican Group (CMG) warned for increased competition and low growth into 2013. McDonald's was making similar comments on Friday, as third quarter sales growth came in at the lowest rate in almost three years. This is despite the fact that McDonald's offers extra-value menus for budget-conscious consumers.

Growth is rapidly slowing down at the moment on the back of intensified competition and a strong dollar. Despite the slowdown in earnings and revenues, the valuation of 16 times earnings seems close to fair for this global brand. The company's debt position is sizable, but manageable. After the recent 10% dividend hike, McDonald's pays a high dividend yield of 3.5% - which provides some downside protection.

I have no convincing arguments for a short or long position, and remain on the sidelines.

Source: McDonald's: Slower Comparable Growth Sales As Competition Intensifies