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McDonald's (MCD) has been the kingpin of fast food for decades and it isn't likely that it will lose the crown anytime soon, if it can help it – and it surely can. But its critics contend that the world's largest fast-food restaurant company should no longer be regarded as a growth enterprise and that investors should ditch or steer clear of its stock.
Don't be fooled. McDonald's isn't unfamiliar with confronting problems and successfully dealing with them — and snapping back. Shares of McDonald's have dropped to as low as $83 a share this year from a 52-week high of $103, but they have since recovered some of that loss, closing on Nov. 8, 2013, at $97.01 a share. That's still below its 52-week high of $103.70, but some analysts see the stock exceeding that high, to about $107-$110.
True, slower growth in Europe and Asia has caused McDonald's' overall growth to lose some steam: Its appeal to customers, particularly in the U.S. where they favor healthier foods, has lost some of its luster. But over the longer term, resilient growth at the quick-service restaurant leader with 35,000 restaurants in 119 countries should be able to spring back to healthier levels, even as its October sales remained weak. Lower-than-expected sales in Japan was a big part of the problem.
Although 2012 and recent quarterly results have disappointed Wall Street, "we expect McDonald's sales to recover in 2013 as the company sharpens its competitive focus domestically and benefits from an established and enhanced value presence internationally," says Jeffrey A. Bernstein, analyst at Barclays Capital. He rates McDonald's as overweight with a price target of $108 a share.
Over the long haul, McDonald's "remains focused on maintaining new unit growth," he adds, and continues to allocate free cash to dividends and share repurchases. In an interview at CNBC on Friday (Nov. 8), Bernstein reiterated his bullish stance on McDonald's, asserting that the company has the resources and determination to rebound and strengthen its industry leadership.
He noted that the stock's solid climb over the past decade has been impressive since the introduction of its "Plan to Win" platform, focusing on better — not just bigger — food on its menu. At the height of the devastating recession in 2008, McDonald's resilience was "well documented, as one of only two names within the Dow 30 to experience stock appreciation," Bernstein points out.
More recently, the company has been challenged by the difficult global macro economy, increased competition, and very difficult sales comparisons, he notes. Management has repeatedly said that its top priority is to reinvest in the business. Beyond capital expenditures, its priorities remain focused on dividends and share repurchases, says Bernstein. And management continues to improve its restaurant menu to adapt and adjust to customers' taste and demand for healthier fast food.
"McDonald's is actively evolving the menu and will soon roll out a new 'Dollar Menu and More' platform," notes Lynne Collier, analyst at investment firm Sterne Agee. Rating the stock a buy with a price target of $107, the analyst says she expects to hear more from management about its new product introductions and plans to drive traffic at the next Analysts' Day meeting in mid-November.
McDonald's derives its revenues from company-owned restaurants, franchising royalties, and licensing agreements. Its restaurants offer menus that are uniformly value-priced, with some variations to adapt to regional preferences. The company's "Plan to Win" platform is a multifaceted attempt to boost sales and earnings, including changes in the variety of menu offerings, longer hours of operations, and affordable prices.
With its "strong brand intangible asset, a cohesive franchise system, and meaningful bargaining power and scale," McDonald's can "eventually return to longer-term targets of 3%-5% system-wide sales growth, 6%-7% operating income growth, and return on incremental invested capital in the high teens," notes research firm Morningstar in a recent report on the company.
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"McDonald's current valuation understates its long-term fundamentals," Morningstar points out, but advises investors to maintain a longer-term investment outlook as the stock may take several months to accelerate much against the competitors' aggressive promotional activity, and limited ability to increase prices.
Morningstar estimates McDonald's will earn $5.62 a share in 2013 on revenues of $28.22 billion, and $6.13 a share in 2014 on revenues of $29.68 billion, up from 2012's $5.36 a share on sales of $27.56 billion. McDonald's current dividend yield is a hefty 3.33%.
In sum, the current price and valuation of McDonald's shares have dropped to attractive levels ahead of the company's expected strong turnaround.
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