McDonald's (MCD) is a company that has enjoyed incredible popularity for many decades. And over the last year or so it has become a popular destination for many individuals looking to dine out on the cheap because of struggling economic conditions. However, some have questioned whether its prowess can continue, and its October same-store-sales dip in the U.S. may have taken some shine off the stock. I don't buy that. In fact, I remain an optimist and think the stock can go higher, even from current levels.
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McDonald's has a very significant presence, which makes it accessible to a sizable number of hungry people throughout the U.S. and all over the entire world. In addition, its generally cheap menu items make it attractive to many diners. Not to mention that the company has very deep pockets and an ability to promote its concept with vigor. In short, I think all of these things have served the company well and that going forward this will continue to be the case.
Recent Comps
As I mentioned above, MCD's October comps weren't great; they were down 0.1% in the U.S. However, overall the company's global comps were up 3.3% in the month, which is impressive. I should also point out that the company had a tough comparison in the U.S. from last year. As well, McDonald's comps in Europe were up an impressive 6.4% in the month. In short, I don't think too much should be read into the company's recent October U.S. comp performance at all.
Competition
There is quite clearly competition in fast food/quick service. As I've mentioned in the past, Starbucks (Nasdaq:SBUX) has made a push in sandwiches and snacks and drinks, and other major chains known for their hamburgers, including Burger King (NYSE:BKC) and Wendy's (NYSE:WEN), are and will likely continue to be impressive competitors as well. Not to mention that chains like Sonic (SONC), which make great hamburgers and are new to many Americans, are springing up and present an attractive alternative.
But the beauty of McDonald's is that it has so many menu items that are loved by so many. Even if the U.S. were to wane at some point over a period of months, the company has a huge overseas presence that could help things out. McDonald's is not becoming complacent, either. The company's been offering coffees and new menu items, and has been redoing some of its locations to make them more aesthetically appealing. In other words, McDonald's is adapting to change, which makes it an attractive investment option.
Valuation
From an investment standpoint, McDonald's certainly isn't on the discount menu. That said, it's not overly expensive either, as it trades at 15.7 times this year's estimate. I find that to be particularly attractive given that the company is also expected to grow its EPS at more than 11% from 2009 to 2010 ($3.96 to $4.40).
Just for reference, Burger King now trades at 12.3 times this year's estimate and analysts expect it to grow its earnings per share from $1.40 in this year to $1.58 in next year, which is an expected growth of about 12.9%. But then again, I don't think that Burger King enjoys all of the advantages that McDonald's does, and I think it will face a lot of headwinds over time in its fight versus McDonald's. As well, I question whether BK will ever truly capture the top spot in America's hearts or digestive systems when it comes to fast food.
Bottom Line
McDonald's is a stupendous company that has shown strong growth over time and that will continue to grow and stand out in this space in the future. I also think it is a good value at about 15.7 times this year's estimate. As my mother and father always used to say, you get what you pay for. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
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