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Using the Value Line Page: McDonald’s is Timely and Safe - December 3, 2010
The Business Description on the Value Line research report for McDonald’s (MCD – Free Analyst Report) provides a good overview of the company’s size and reach. Indeed, with over 32,000 restaurants around the world either owned or franchised, the so-called Golden Arches represent probably the single best-known food concept on Earth. That alone, however, doesn’t necessarily make a stock a good investment. A thourough overview of the Value Line report, however, shows that McDonald’s shares are a compelling option for both momentum investors and those with an eye toward the long term.
McDonald’s for the Aggressive Investor
McDonald’s recently reported solid numbers for the third quarter (read Value Line’s Supplementary report on McDonald’s third-quarter results). Earnings of $1.29 a share were driven by solid margins and a low-single-digit increase in total sales. What Value Line analyst Matthew Spencer found particularly compelling, however, was that the company managed to edge out his forecasts slightly for both earnings (by four cents) and margins (by 100 basis points, or one percentage point). The company is clearly doing something right and has been for some time.
In fact, if one examines the historical component of the Statistical Array, it becomes clear that the earnings trend here has been on a clear upward path since 2002. Note that the recent recession, highlighted in the Graph by a shaded box, didn’t seem to affect McDonald’s results, as it posted higher sales and earnings through the worst of the downturn.
The recent quarterly numbers also highlighted the company’s strength around the world, with comparable-store sales up 6.0% on a global basis in the recent September period. Breaking that down geographically, the company’s comparable-store sales climbed 5.3% in the United States, 4.1% in Europe, and 8.1% in the region comprised of Asia/Pacific, the Middle East, and Africa. As noted in the Business Description, the company generates about 65% of its sales overseas, so it is doubly impressive to see the strength in the Asia/Pacific, Middle East, and Africa segment, as these regions are generally expected to drive much of the world’s growth in the coming years. Rising living standards are the main component of this expectation, as eating habits tend to change with wealth advances.
Recent solid results, of which the third quarter is just one example, underpin the stocks better than average rank of 2 for Timeliness (found in the Ranks box at the top left of every Value Line report). Although this isn’t the best possible score, it suggests that the shares are likely to outperform the general market over the next six to 12 months. This, combined with the highest possible Safety Rank (1), which will be discussed in greater detail below, makes the risk/reward profile of McDonald’s shares one that momentum investors shouldn’t ignore simply because it doesn’t have the Highest Timeliness rank.
McDonald’s for the Conservative Investor
With a long history of solid operating and financial performances that look likely to continue going forward, McDonald’s should easily pop up on most investors’ screens of interesting stocks. However, good business and stock performances don’t mean that every investor should be interested in a stock, as the risk associated with top-performing companies can often cause more conservative investors to shy away. That, however, is not the case with McDonald’s—not only is doing well, but it has been doing so with a low level of risk for decades now.
The company’s top-notch score for Safety was noted above, but that single score takes into account other factors. One of those factors is the company’s Financial Strength, which can be found in the Ratings box at the bottom right of each Value Line report. The A++ that McDonald’s receives is our Highest score. Moreover, the shares earn high ratings for Value Line’s proprietary ranks of Price Stability, Price Growth Persistence, and Earnings Predictability. In fact, Price Stability and Earnings Predictability are both 100, which is the best possible score.
The shares’ relatively low Beta coefficient, found in the Ranks box with Value Line’s proprietary Timeliness, Safety, and Technical ranks, is another example of the low level of risk associated with McDonald’s stock. Beta measures price movements relative to a broader index of stocks. In this case, McDonald’s shares have a Beta of 0.65, which means that the stock would be expected to move, in either direction, just 0.65% for a 1% move in the broader market. Thus, the shares have a below-average level of volatility, which should be of interest to conservative accounts.
In addition to these ratings and ranks, management at McDonald’s has proven that it intends to reward investors as the company’s success grows. The most notable example of this is the dividend payout, which, as can be seen in the historical component of Statistical Array, has been increased every year since 1994. Most recently, the company increased the quarterly payout to $0.61 in the final month of the year. As Value Line analyst Matthew Spencer highlights in the Commentary, returning money to shareholders remains a priority. In fact, Spencer expects more share repurchases in addition to regular increases in the dividend payment. His estimates on both fronts can be found in the projections section of the Statistical Array, which appears to the right of the row headings.
With a clear emphasis on shareholders, a strong financial profile, and good near-term prospects, McDonald’s shares should be on every investors’ holiday wish list.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.