We are maintaining our long-term Neutral recommendation for McDonald’s Corporation (MCD). With a strong balance sheet and consistent earnings, we think that the stock provides relatively safe and moderate growth prospects with its exposure to faster-growing international markets.
McDonald’s continues to grow global same-store sales, maintain healthy margins and outperform competitors. Global comparable-store sales rose 4.8% in the month of November with U.S. sales up 4.9%, Europe up 4.9% and Asia/Pacific, Middle East and Africa (APMEA) up 2.4%.
Although comparable sales growth stepped up from 0.7% recorded in November 2009, the momentum slowed down sequentially. In the month of October, McDonald’s recorded a 6.5% growth in comparable sales. The global comparable sales growth came on the heels of strong sales of beverage and core menu products.
Moreover, a heavily franchised strategy helps to drive steady cash flow and reduces McDonald’s capital requirements. Currently, 81% of total restaurants are franchised. We believe over the next few quarters revenues will grow through unit expansion and strong comps momentum driven by value offerings as well as premium products. The world’s largest hamburger chain is also planning to boost its investment in China by 40% in the next year, as compared with 25% in 2010.
However, economic headwinds, which have affected consumers’ disposable income, are impeding growth and due to the company’s high exposure to international markets, McDonald’s remains prone to currency fluctuations.
Moreover, competition with fast-casual restaurants likes Yum Brands Inc! (YUM) and California Pizza Kitchen Inc (CPKI) is expected to remain fierce regarding price, service, location and concept in order to drive traffic, which may adversely affect the company’s restaurant operating margins and profits.
The company also expects commodity cost to rise slightly in Europe in the fourth quarter of 2010. In the U.S, McDonald’s expects cost inflation in the range of 1% to 2% year over year. Additionally, business in Europe might be affected by the implementation of some austere measures.
Value-added tax increases in January 2011, in some European countries like U.K., Poland and Portugal will drive price increases for the consumer while providing no same store sales benefit. Moreover, in the last 60 days, the estimates have not budged for the fourth quarter of 2010 and fiscal 2010, thus indicating no significant catalyst in the near term.
CALIF PIZZA KIT (CPKI): Free Stock Analysis Report
MCDONALDS CORP (MCD): Free Stock Analysis Report
YUM! BRANDS INC (YUM): Free Stock Analysis Report
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