It doesn’t come as a surprise to read on the North Ohio Heart blog that McDonald’s Corp. has become one of the most popular fast food restaurants worldwide, feeding around 45 million people daily.
In 2011, people spent $81 billion at McDonald’s, making it the most popular fast food restaurant worldwide, followed by Subway, which sold $14 billion worth of food.
McDonald’s global sales growth increased by 3.3 percent in May, with a 4.4 percent increase in the United States alone, a 2.9 percent increase in Europe, and a 1.7 percent decrease in all other regions, according to a June press release.
“Continuing demand for McDonald’s breakfast, including the launch of the seasonal Blueberry Banana Nut Oatmeal, coupled with new McCafe beverage favorites like the Cherry Berry Chiller along with everyday value and the ongoing popularity of core menu favorites drove results,” McDonald’s announced in their June release.
Some Analysts Proclaim Good News
“McDonald’s has been a top performer in the restaurant sector over the past decade after the company made a dramatic shift in its menu,” according to a June stock analysis on the Profit Confidential website.
The analysis goes on to say that despite McDonald’s offering healthy food to its customers, its main sellers are still the well-known burgers, chicken nuggets, fries, and soda.
The stock analyst suggests that McDonald’s strategy has worked well for the company, as its sales outperform by far any other fast food restaurant, including Burger King and The Wendy’s Co.
“You could have picked up a share of McDonald’s for below $8.00 in 1990 or at the $14.00 level in 2003 before the current nine-year bullish technical trend in the stock,” the analyst said.
The analysis suggests that those who are still interested in owning McDonald’s stock should look at the Latin American market where the stock still has high growth potential.
Arcos Dorados Holdings Inc. is put forward by the stock analyst as the largest McDonald’s franchisee, not only for the Latin American region, but worldwide, as it “operates or franchises 1,840 McDonald’s-branded restaurants in 20 Latin American and Caribbean countries and territories.”
Apparently, the stock price of Arcos Dorados is underperforming, according to the Profit Confidential review. A look at Arcos Dorados’s closing stock prices so far this year shows that their stock peaked at $22.94 on Feb. 6, while the lowest price was $12.39 on May 17. The closing price on June 29 was $14.78.
“There is a mispricing of Arcos Dorados in the marketplace, probably due to the fact the stores are situated in Latin America,” according to the Profit Confidential analysis.
The stock analysis suggests that the Arcos Dorados portion of McDonald’s revenue should grow at a faster rate than that of U.S. operations. McDonald’s revenue growth rate is predicted to be 2.3 percent in 2012 and 5.5 percent in 2013. In comparison, Arcos Dorados’s revenue growth potential is 9.3 percent to $4 billion in 2012 and 13.9 percent to $4.6 billion in 2013.
“While McDonald’s has been on an impressive upward trajectory, my stock analysis suggests that Arcos Dorados represents a potentially more rewarding risk-reward situation,” the stock analyst said.
Honor Student Status Challenged
McDonald’s “is not a company with a high enough grade-point average to invest your money in, at this time. However, the company will, once again, be a buy in the coming months. You will be rewarded if you have patience,” according to a recent Seeking Alpha review of McDonald’s.
The review suggests that although McDonald’s still deserves to be graded an ‘A’, it can’t be counted as among the honor students. Basically, McDonald’s has passed its bullish cycle and is more or less in a bearish cycle.
The recommendation is to wait when it comes to buying McDonald’s stock. What’s important at this time to hang on to the thought that McDonald’s fundamentals are good and analysts’ opinions have by no means discarded the company to the junk heap.
The review said, “Waiting for the next bullish cycle to reappear is difficult for most investors. That is why most investors hold their positions and hope for the best during bearish cycles. I suggest that ‘hope’ is a lousy strategy of investing your money though out [sic] a lifetime!”
A July 1 Seeking Alpha article suggests that McDonald’s growth potential has slowed down when compared to its peers, but the market is undervaluing the company’s stock because of the slow growth.
In the long run, when compared to its peers, “the firm has a superior profitability and a very solid liquidity position relative to the peer group,” the article said.
Disappointing Global Sales
“McDonald’s has been a stellar stock to own. … Then again, McDonald’s tough operational comparisons with past stellar years, the macroeconomic uncertainty, and Skinner’s [Jim Skinner, CEO at McDonald’s] approaching retirement [June 30] all add a little extra risk right now,” according to a June review of McDonald’s on The Motley Fool website.
The Motley Fool review focused mostly on the latest global sales growth, which was disappointing in May of this year. As previously stated, McDonald’s global growth was only 3.3 percent with a 1.7 percent decrease in Asia, the Middle East, and Africa. The Asian sales growth, given the size of the market and the high growth potential, is watched closely by investors.
“Such a disappointment is significant, because Asian market sales potential is highly coveted by investors,” the Motley Fool review suggested.
Stock Priced Appropriately
McDonald’s had a good 2011 year-end, and investors were looking forward to a continued upward move with new investors coming through the door.
“Not only did the rally not continue, but as of two weeks ago, shares of the world’s biggest restaurant chain have actually lost 11% of their January peak, with no apparent floor in sight,” according to a June 19 article on the Street Authority website.
The stock analyst looked for reasons, but couldn’t come up with any reasonable explanations and so just said that the stock ignored anything positive and went its own way. In mid-June, Goldman Sachs Group Inc. downgraded McDonald’s from “buy” to “neutral,” and suggested that the shares were underperforming, according to analyst reports.
“Stocks don’t always reflect a reasonable value. McDonald’s was undervalued in 2009 when it was trading at less than 15 times earnings, and was overvalued in late 2011 when it was trading at 19 times earnings. Eventually, every stock is priced appropriately, so the market clearly knew enough to send McDonald’s shares lower from January’s highs,” the Street Authority article said.
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