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Opportunity with McDonald's Experiencing Temporary Setbacks

June 11, 2012 | About:
McDonald's (MCD) recently announced on Friday that May comparable sales growth missed Wall Street's expectations. It also warned that the current European situation and the global economic volatility are affecting its business performance.

The global comparable sales growth in May was 3.3%, whereas analysts had expected the growth to be around 4.6% to 5.2%. In May, the U.S. segment was up 4.4%, Europe was up 2.9% and Asia/Pacific, Middle East and Africa (APMEA) combined was down 1.7%. In the third region, the positive result in Australia was more than offset by negative results in Japan and China. The company is focusing on its key differentiators in APMEA, which are locally customized menu variety and convenience enhancements.

However, the weaker growth news is not affecting its stock price too much. Its share price declined 2.8% in pre-market trading on Friday, and close at the decline of only 0.71%. Now it's share price is staying at $87.75 per share, with the total market capitalization of $89.18 billion. It is interesting to note that, since March 2012, McDonald's stock has been in the decreasing trend, from $100 range to $87, with the fall of 13%.

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ycharts.com


Looking at a longer time horizon, McDonald's stock has done extremely well for its patient shareholders for quite a long time, especially since 2003, as I indicated in my article about McDonald's in February 2012. At this time of writing, McDonald is valued much lower than its peers in the franchise industry at 16.5x earnings, 6.1x its book value and 12.7x its operating cash flow. While Yum Brands (YUM) is trading at 21.1x P/E, 14.3x P/B and 14.9x P/CF, and the market is valuing Starbucks Corporation (SBUX) at 31x its earnings, 7.9x its book value and 27.1x its cash flow.

I think McDonald's will continue to be the largest fast food chain in the world with the continuing growth. In addition, it's trading at lower valuation than its main two competitors in the industry. Investors could have high probability to gain more wealth by accumulating shares while its stock price is experiencing a short-term decline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


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