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McDonald's Powers Through Recession
Posted: Feb 02, 2009 14:17 PM by Greg Sushinsky
When McDonald's Corp. (NYSE:MCD) recently reported its fourth quarter earnings, some observers maintained that the fast food behemoth was slowing down, that the company's performance was taking a downturn. Despite the supposed recession-proof fast food business, what's the story? Is McDonald's succumbing to the economic rough waters, like everything from housing to cars to any and every other kind of business you can think of? What are the company's prospects in the immediate future, also what can investors look for from the stock? (For more on investing in supposed recession-proof industries, read Recession-Proof Your Portfolio and Industries That Thrive On Recession.)
Confused Reception
With the Monday, January 26 report on McDonald's fourth quarter 2008 earnings, Wall Street reacted in a mixed fashion. An article in Reuters emphasized that the 87 cents earnings per share (EPS), while beating the Street's estimate of 83 cents, was down from the previous year's quarter, which they listed at $1.06. Also emphasized was a revenue dip below expectations, which came in at $5.57 billion instead of $5.7 billion. Furthermore, "slackening sales" were cited as the October gains in same store sales had been 8.2%, November had seen a 7.7 % increase, and December had only seen gains of 5.8%. The stock dipped slightly on the news.
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A Better Handle on the Golden Arches' Numbers
If we look at McDonald's numbers a little more closely, several things stand out. For one, the $1.06 a share EPS for the fourth quarter in 2007 was achieved with a sizeable net tax gain. Total income for the fourth quarter 2008 was $985 million, versus the $1.27 billion for the fourth quarter in 2007. Fully diluted operational EPS in the fourth quarter 2007 without the tax gain, however, was actually closer to 69 cents which comes to around $925 million. So the 87 cents in EPS for the latest report, results for the fourth quarter 2008, are actually a substantial increase in operating income. While overall sales were down 3%, revenue was adversely affected by currency exchange rates, so this is another factor to consider.
Also, it should be added that while some competitors, such as Sonic (Nasdaq:SONC) recently reported significant falling profits, McDonald's profit numbers were actually more positive news; even the slowing of sales were largely slowing down the rate of gains or due to the currency exchanges previously mentioned. Sonic, a less diverse burger place, has been attempting to get its own value menu approach going, but is having less success than McDonald's. The continued wide-ranging success and strength of McDonald's diverse approaches is a perspective somehow ignored or lost on many investment pros.
How Are the Others Doing?
The fast-food space is a crowded one, so in addition to Sonic's fortunes, it pays to take a look at how some of McDonald's other competitors are doing. Burger King Holdings (NYSE:BKC) which admittedly has been "chasing McDonald's" and has been trying to "follow McDonald's playbook," as Norm Alster writes in an Investor's Business Daily article, has seen them have some success with both their value and premium approaches. Wendy's Arby's Group (NYSE:WEN), the fairly new amalgam of Wendy's and Arby's, has seen Wendy's already give up the breakfast battle with McDonald's, but it still has a strong value menu. Integration with Arby's will be ongoing. Jack In The Box, Inc. (Nasdaq:JACK) got a great write-up in Motley Fool with its increasing earnings and promising growth trajectory. Think of Jack in the Box as a Sonic that works better right now. Yum! Brands (NYSE:YUM), with its eclectic mix of Taco Bell-Pizza Hut-KFC-Long John Silver's, was also cited for continuing strong growth prospects. So despite the recession and some headwinds in the business, fast food is still doing pretty well.
McDonald's Place
McDonald's EPS even in this recession is projected to grow to $3.84 in 2009 and $4.18 in 2010, which puts its immediate earnings growth rate projected in the 9% range, not bad for hard times. The company has a $65 billion market cap, with nearly $1.5 billion cash on hand, and debt of less than $10 billion and it generates a whopping $5.73 billion annual operating cash flow. A thriving restaurant can be a cash flow king, even more so can a thriving fast-food restaurant, and McDonald's is all that. This is a solid base of operational strength. The stock has held up fairly well in the down markets, as it has traded between $45 and $67 this past year and is currently around $58 at a price-earnings ratio (P/E ratio) of just under 15. Right now the company may be much more impressive than the stock in this economy and market, but given time the stock should equally impress.
Learn to put your money where your mouth is, in Sinking Your Teeth Into Restaurant Stocks.
By Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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