GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Wait Before You Write-off McDonald's From Your Potential Investments!

July 09, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

1 followers

This information age is sometimes fondly referred to as the age of millenials, of people who strive for instant gratification in anything they do. While there are a good number of negatives associated with the millenials, the one thing that has changed from the past and for the better is their health conscious attitude. The online media is now filled with reports and suggestions on medical well-being that are circulated among a wide population. Even though this is a great development from a longevity point of view, it might not bode well for the fast food conglomerate McDonald’s (MCD).

Declining customer loyalty?

Recently, a Consumer Report came out with a grim survey about McDonald's. Out of the 21 national and regional fast food chains surveyed, McDonald's had the worst-rated hamburgers besides KFC’s worst chicken and Taco Bell’s worst burritos. While, I am not in favour of judging the quality of McDonald’s products only on the basis of this consumer report but the fact is that such an observation from the US markets, which forms approximately 45% of McDonald’s overall income, is alarming. It is time that the company realizes the acute need for incorporating the views of customers while designing their products to be able to reign in the markets.

McDonald’s is a value generator

In one of my last articles, I talked about the value that McDonald’s plans to generate for its shareholders via dividends and share repurchases. In fact, this has been one of the most impressive things about the company. Even when it failed to meet the Street expectations in the first quarter, the company still offered hefty dividends to its shareholders catapulting the stock to render an effective yield of 3.2%. In comparison to other food chains like Burger King and Taco Bell, returns generated by McDonald’s were highly impressive.

Business overseas

It is no stranger to us that the company is facing the heat in the US markets and is struggling to sustain its revenues in this region because of extreme competition from national as well as local chains. However, it would be grossly unfair if we were to keep our focus only on the US markets and ignore McDonald’s overseas business. As mentioned in the last article, the company operates through a massive franchise model with more than 80 percent of its stores across the globe following the franchise arrangement.

In the first quarter of 2014, the European markets fared quite better than the US with comparable store sales up by 1.4% and operating income up by 4% in constant currency. In Europe, markets like the UK, France and Russia made a positive contribution to company’s revenue by making some valuable changes in local menu and offering products that went well with the preference of customers.

In the Asian region, China came out to be a superstar performer as it reported a growth of 6.6% in same-store sales after the last year chicken related crisis settled in the region. As a result of a sturdy performance, the management has decided to open 300 new outlets this year in China of which a certain percentage would offer delivery services. Thus, the Asia-Pacific region should be a high focus area for investors and analysts in the next few quarters.

Takeaway

McDonald’s is a colossal company with over 35000 stores under its brand and serving approximately 70 million customers per day across the globe. Undeniably, the company’s declining performance in the US is a concern but as was evident in the earnings call, the management has stepped up efforts in improving its product and service quality to attract customers. Along with these, the company is also experimenting with other initiatives like beverages, desert kiosks etc. to pump up the sales in the region.

If figures are to be believed then the Americans will spend around $683 billion in 2014 on eating out and this represents an enormous opportunity. The best move for now would be to watch McDonald’s from the side-lines as it tries to ramp up its performance in the US and major European markets. The next quarter results would provide a better insight into the effectiveness of its strategies and a better point to judge its investment potential.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

Rating: 0.0/5 (0 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide