McDonalds: Global Exposure Perfect For a U.S. Economic Slowdown
Wednesday, January 9, 2008 | John M Is this Spam?McDonald's: Global Exposure Perfect For a U.S. Economic Slowdown
The negative job numbers released today reporting higher unemployment and declining job growth are indicators of an economic slowdown even to a Bull like me. With an economic slowdown in the U.S., stocks with global exposure are becoming increasingly more attractive. In today’s market McDonald's (MCD) may be the stock you are looking for, a major player in the global economy as the leading food service retailer with over 30,000 restaurants in more than 100 countries.
McDonald's has come along way since the Big Mac, at roughly $57 per share McDonald's has made a complete turn around since March 2003 when the stock sat at a decade low of $12.50 per share.
Since 2003 McDonald's has been on the move. Their ability to innovate in the food service sector is unmatched by competitors. Recently McDonald's has diversified their traditional food menu by adding a healthier foods line, the introduction of Angus burgers, snack wraps, and the expansion of coffee beverage product. Their new coffee beverage line has been so successful McDonald's has been able to gain market share from Dunkin Donuts and Starbucks.
Although the stock had a huge run this year, the turbulent market is delivering more reason for McDonald's shares to rise as market nervous investors are finding a safe haven in the Big Mac. McDonald's will grow on its own strength, but with a perceived economic slowdown investors should accelerate (MCD) stock growth.
Investors like the global exposure, organizational direction, and significant dividend. McDonalds pays a $1.50 dividend increasing every year since they began offering one in 1976, almost doubling since 2003. With a sliding economy bringing a $1.50 dividend is becoming very appealing to investors.
Analysts believe McDonald's is poised to hold steady through a U.S. economic slowdown based on their global exposure. Globally more then 65% of McDonald's business comes from overseas. In November global sales were impressive as comparable sales rose 7.0% for year-end November. In Asia McDonald's posted a sales increase of 11.4%, the highest quarterly result in Asia in 10 years. In Europe comparable sales increased 10.8% from a year ago.
Quarter ending Sept. 30, 2007 saw McDonald’s report global comparable sales increase of 6.9% their 18th consecutive quarter of same-store sales increases. McDonald's also reported record company revenues of $5.9 billion up 7% over the previous year, and operating income of $1.525 billion, up 18%.
The credit for McDonald's turn around since the early 2003 goes to their operating strategy, “A Plan To Win”. "Globally, we’ve delivered 54 consecutive months of comparable sales increases," CEO Skinner said. "The Plan to Win is working. It is a dynamic framework for how we approach the business. It is not static. We continue to learn from what’s working as well as what’s not, and have more insight on what will appeal to our valued customers in the future."
Skinners plan to win is based on making the company “better not necessarily bigger”. Management sets growth targets of average annual sales and revenue growth of 3% to 5% and average annual operating income growth of 6% to 7%. They are weary of growing to fast at the expense of profitability, a lesson learned from past operating experiences.
“We’ve stayed focused and disciplined financially. That’s allowed us to consistently exceed the growth targets we laid out in 2003," Skinner said. "These targets have served us well, and will not change in the near term. They are realistic, sustainable, and will help us make the best decisions for the long-term benefit of our shareholders." The plan is working so there is no reason not to expect some of the same form McDonald's in the upcoming year.
The most recent 3rd quarterly results show substantial growth as earnings per share increased 31% to 89 cents and McDonald's Corp. purchased 98.4 million shares of company stock for 3.7 billion. Third quarter results represent seven consecutive quarters of increased sales.
Year-end 2007 earnings are looking strong and the street is raising estimates based on their 3rd quarter results. With 4th quarter results to be released January 28, Goldman Sacks raised earnings estimates for 2007 to $2.87 per share from $2.86, citing substantial November growth as the economy slides. Goldman also increased their estimates for 2008 and 2009 while raising the price target from $66 to $68 per share. As the economy slowed in 2007 McDonald's stock growth accelerated as shown in the 1yr chart below.
Either way you slice it, since early 2003 McDonald's has changed their business operations model and the results have been exciting. They have the revenue growth to prove it and the international exposure to survive an economic slowdown. McDonald's has re-established them selves as the premiere global food service retailer with strong management and significant dividend for shareholders.
The variety of menu options and the innovation to compete in the beverage market will continue driving future sales. As the economy takes it’s lumps and bruises, investors should favor McDonald's and their global player status. The stock has pulled back a bit from their December high of almost $64 creating a buying opportunity. I am looking for (MCD) to trade between $65 and $70 per share over the next six to twelve months.
