A Look at McDonald´s Performance

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Mar 28, 2015

In this article, let's take a look at McDonald's Corp. (MCD, Financial), a $93.19 billion market cap company, which ist he largest fast-food restaurant company in the world, with about 35,000 restaurants in 119 countries.

Revenues, Earnings, Margins and Profitability

Looking at profitability, revenue declined by 7.35% to $6.75 billion and earnings per share decreased in the fourth quarter compared to the same fourth quarter a year ago ($1.13 vs $1.40). During the past fiscal year, the company reported lower earnings of $4.83 versus $5.56 in the previous year. This year, Wall Street expects an improvement in earnings ($4.98 versus $4.83).

The gross profit margin is considered to be high at 38.10% and the net profit margin of 17.34% is ranked higher than 96% of the 380 Companies in the Restaurants industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
MCD Mc Donalds 31.81
WEN Wendy´s 6.87
YUM YUM Brands 48.85
DRI Darden Restaurants 31.53
SBUX Starbucks 48.37
 Industry Median 10.84

The company has a good current ROE of 31.81% which is higher than the industry median and the one exhibit by Wendy´s (WEN, Financial) and slightly above the one of Darden Restaurants (DRI, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, YUM Brands (YUM, Financial) and Starbucks (SBUX, Financial) could be the options.

It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Year ROE (%)
Dec-05 17.73
Dec-06 23.16
Dec-07 15.58
Dec-08 30.1
Dec-09 33.2
Dec-10 34.51
Dec-11 37.92
Dec-12 36.82
Dec-13 35.69
Dec-14 32.97

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 20.3x, trading at a discount compared to an average of 36.4x for the industry. To use another metric, its price-to-book ratio of 7.50x indicates a premium versus the industry average of 4.08x while the price-to-sales ratio of 3.50x is above the industry average of 1.47x. All these metrics indicate a buy recommendation.

The stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $17.891, which represents a 12.3% compound annual growth rate (CAGR).

The company has a negative EPS growth over the past years and the company's shares dropped by 3.6% over the past year.

Final Comment

With the economic recovery, customers are beginning to consume more fast food. Further, we believe this company has strong competitive advantages in its major brands.

Although the fourth quarter results are not so good, the relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Brian Rogers (Trades, Portfolio) initiated a position of 803,200 shares, while other hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Mason Hawkins (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio) and the funds Caxton Associates (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) have taken long positions in the fourth quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned