In this article, let's take a look at McDonald's Corp. (MCD, Financial), a $93.57 billion market cap company, which is the largest fast-food restaurant company in the world, with about 35,000 restaurants in 119 countries.
Performance
From 2004 to 2011 the company has very good performance, achieving growth in sales at a rate of 5.6% and also having operating margin expansion to more than 30%.
| Year Ended | Dec05 | Dec06 | Dec07 | Dec08 | Dec09 | Dec10 | Dec11 | Dec12 | Dec13 | Mar-14 |
| Op. Margin (%) | 20.84 | 21.22 | 17.02 | 27.39 | 30.08 | 31.04 | 31.58 | 31.21 | 31.18 | 31.03 |
Despite this, the company's fundamentals have weakened for some reasons. Competition has increased steadily, the economic scenario the firm is involved in, and the consumer preferences which are always changing.
The firm focuses on four things in order to get operational improvements. Organizational accountability, customer centricity, "progress over perfection," and process simplification are the main pillars of the strategy.
Dividends and share repurchases
The company returns good cash to shareholders via dividends and buybacks. Year to date, it has returned about $4 billion through dividends and share repurchases. The stock's yield is 3.38% and is close to a five-year high and is ranked higher than 82% of the 298 companies in the Global Restaurants industry. Logically, the company must generate sufficient cash flow to maintain these policies.
Breaking news
The past month, the company cut 225 corporate employees as part of a cost-cutting initiative. About 60% of the job eliminations came down in Chicago. Despite this, McDonald's has about 420,000 workers worldwide.
Revenues, earnings, margins and profitability
Looking at profitability, revenue declined by 9.53% to $6.497 billion from $7.181 billion and earnings per share decreased in the second quarter compared to the same quarter a year ago ($1.26 vs $1.40). The revenue drop was extended by foreign currency effects.
Looking ahead to the third quarter, we expect positive global comparable sales led by growth in our newly created international lead market segment and China's continuing recovery in the 2014 APMEA supplier issue, said CEO Steve Easterbrook.
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 ($4.75 versus $4.83).
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 Donald's | 32.35 |
| WEN | Wendy's | 6.58 |
| YUM | YUM Brands | 47.70 |
| DRI | Darden Restaurants | 32.36 |
| SBUX | Starbucks | 48.11 |
| Â | Industry Median | 7.87 |
The company has a good current ROE of 32.35% which is higher than the industry median and the one exhibit by Wendy's (WEN, Financial) and the same 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.
| Quarter Ended | Mar-13 | Jun-13 | Sep-13 | Dec13 | Mar-14 | Jun-14 | Sep-14 | Dec14 | Mar-15 | Jun-15 |
| ROE (%) | 33.29 | 36.75 | 40.14 | 35.85 | 29.97 | 34.35 | 28.70 | 33.16 | 26.76 | 43.79 |
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 23.0x, trading at a discount compared to an average of 29.8x for the industry. To use another metric, its price-to-book ratio of 9.02x indicates a premium versus the industry average of 3.15x while the price-to-sales ratio of 3.70x is above the industry average of 1.20x. The P/B and P/S ratios are close to 10-year high.
As we can see in the next chart, 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 $16.133, which represents a 10.2% compound annual growth rate (CAGR).
Final comment
We believe that people are returning to fast food, and McDonald's is the world’s largest restaurant chain, with the highest yield in the market. Although the last 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. Further, I think the valuation not seems expensive based on PE ratio.
Manning & Napier Advisors, Inc has taken long position in the stock in Q2. The fund upped 10.07% its portfolio to 167,756 shares. Also, Pioneer Investments (Trades, Portfolio) was bullish in the second quarter by increasing the stake by 1.43% to 31,697 shares.
Disclosure: Omar Venerio holds no position in any stocks mentioned
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