Everybody knows McDonald's (MCD, Financial). The U.S. domiciled burger chain operates 6,400 restaurants, franchised another 26,338 and exhibits one of the most global restaurant footprints in the world. Whoever travels around the world will have recognized that McDonald's restaurants are well frequented at the very least. Not only does the very business model of offering the same products everywhere in the world allow it to create a unique value for its customers, but it is also able to attract new customers to its restaurants (just think about the rice and chicken meals in Asia).
As a global company, however, McDonald's isn’t missing out on adjusting to local needs and food customs by catering to its customers with special products. Especially in Asia, McDonald's is hugely successful, with restaurants packed and new restaurants opening at a rapid pace. In our opinion, McDonald's competitive advantage lies in its ability to not only deliver a very competitive product mix adjusted to local flavors at an attractive price, but also to efficiently run its system-wide restaurants. McDonald's restaurants have a reputation for service, readiness and tidiness.
If one looks at Porter’s Five Forces where you identify factors which determine and reveal a competitive advantage a company hopefully has in order to operate successfully in the long-term, McDonald's exhibits a set of attributes that makes its competitive position attractive: The combination of a globally recognized brand, a strong global footprint with increasing growth and dominance in Asia, a competitive product mix, the expansion into new customer segments (McCafe) make us believe that McDonalds possesses a world leading brand equity. In fact, the brand name “McDonald's” has become so widely acknowledged in almost every corner in the world mainly because of its sponsoring activities of high-profile media events and extensive promotional activities, that the penetration of new markets and segments appears to be quite fast.
Just based on its product offering, its strong franchise value and related growth opportunities, McDonald's clearly possesses characteristics that every long-term investor would appreciate. In addition, McDonald's management seems to be very shareholder-friendly with share repurchases of $2.7 billion and $2.4 billion just in 2011. Dividends have been steadily increasing for 35 years without a single down year. The CAGR for dividends since 2005 has been a staggering 27.5% based on a $2.26 annual dividend for FY2010. Our estimate for the FY2011 dividend, in line with the historical CAGR 2005-2010, would be $2.88. If we conservatively estimate a flat quarterly dividend of $0.61 for the year, the stock would yield 3.1% based on Friday's closing price.
Considering the steady and consistent dividend hikes in the past decades this seems quite attractive to us, especially if you realize the tremendously powerful concept of compounding.
As to a target price: We usually do not formulate any target prices as many analysts do. We refrain from doing this because we like to think for ourselves and are clearly aware of the underlying bias and incentive structures of broker firms that render target prices meaningless particularly during sentiment-driven market activity. However, we are convinced that McDonald's continues to deliver to its customers and continues its shareholder focused approach, which over the long term should equate to a substantially higher share value (or stock splits).
Global Value Investor
As a global company, however, McDonald's isn’t missing out on adjusting to local needs and food customs by catering to its customers with special products. Especially in Asia, McDonald's is hugely successful, with restaurants packed and new restaurants opening at a rapid pace. In our opinion, McDonald's competitive advantage lies in its ability to not only deliver a very competitive product mix adjusted to local flavors at an attractive price, but also to efficiently run its system-wide restaurants. McDonald's restaurants have a reputation for service, readiness and tidiness.
If one looks at Porter’s Five Forces where you identify factors which determine and reveal a competitive advantage a company hopefully has in order to operate successfully in the long-term, McDonald's exhibits a set of attributes that makes its competitive position attractive: The combination of a globally recognized brand, a strong global footprint with increasing growth and dominance in Asia, a competitive product mix, the expansion into new customer segments (McCafe) make us believe that McDonalds possesses a world leading brand equity. In fact, the brand name “McDonald's” has become so widely acknowledged in almost every corner in the world mainly because of its sponsoring activities of high-profile media events and extensive promotional activities, that the penetration of new markets and segments appears to be quite fast.
Just based on its product offering, its strong franchise value and related growth opportunities, McDonald's clearly possesses characteristics that every long-term investor would appreciate. In addition, McDonald's management seems to be very shareholder-friendly with share repurchases of $2.7 billion and $2.4 billion just in 2011. Dividends have been steadily increasing for 35 years without a single down year. The CAGR for dividends since 2005 has been a staggering 27.5% based on a $2.26 annual dividend for FY2010. Our estimate for the FY2011 dividend, in line with the historical CAGR 2005-2010, would be $2.88. If we conservatively estimate a flat quarterly dividend of $0.61 for the year, the stock would yield 3.1% based on Friday's closing price.
Considering the steady and consistent dividend hikes in the past decades this seems quite attractive to us, especially if you realize the tremendously powerful concept of compounding.
As to a target price: We usually do not formulate any target prices as many analysts do. We refrain from doing this because we like to think for ourselves and are clearly aware of the underlying bias and incentive structures of broker firms that render target prices meaningless particularly during sentiment-driven market activity. However, we are convinced that McDonald's continues to deliver to its customers and continues its shareholder focused approach, which over the long term should equate to a substantially higher share value (or stock splits).
Global Value Investor
