What is it?
McDonald’s is a global chain of restaurants. Its fast-food products include hamburgers (particularly the famous Big Mac), Filet-O-Fish, chicken sandwiches, wraps, french fries, salads, McFlurry desserts and McCafé drinks. McDonald’s has 33,144 restaurants in 119 countries of which around 80% are franchised. It serves around 64 million customers every day.
What is the company’s history?
In 1948, Dick and Mac McDonald opened a self-service restaurant in San Bernardino, California. The mainstay of its menu was the 15-cent hamburger. The company’s pathway to rapid growth began in 1955 when Ray Kroc established the franchising model. The first foreign restaurants opened in Canada and Puerto Rico in 1967. Successful growth in the 1960s and 1970s gave way to the “burger wars” during the 1980s against Burger King and Wendy’s. The 1990s saw McDonald’s struggle in its core US market. Despite this, continued growth in overseas markets and a turnaround strategy in the US has seen the company handsomely reward long-term investors. Since 1989, dividends have grown at an average rate of 17% per year, with the share price up from $8 to today’s $92.
Who runs it?
James Skinner has been chief executive since 2004 and has worked for the company for the last 40 years. His salary was $1.4m in 2010. Andrew McKenna is chairman and Peter Bensen is the chief financial officer.
How’s trading?
Results for the three months to 30 September saw sales and operating profits increase by 14% to $7.2bn and $2.4bn respectively, driven by global like-for-like sales growth of 5% and currency gains. Earnings per share increased by 12% to $1.45 while the quarterly dividend was raised by 15% to $0.70 per share. Despite strong competition, McDonald’s gained market share via its chicken products, McCafé beverages and breakfasts.
What’s the outlook?
Competition is intense while disposable incomes remain under pressure. McDonald’s is conscious of the need to keep its products affordable, which limits its ability to raise prices. Commodity costs – particularly beef prices – continue to increase and could lead to lower margins going forward. Longer-term, the key driver of growth will be the continued expansion of the company’s very profitable franchised restaurants. McDonald’s remains committed to returning all its free cash flow to shareholders via increased dividends and share buy-backs.
The analysts
Of the 29 analysts surveyed by Bloomberg, 20 say “buy”, and nine “hold”. There are no “sell” recommendations. The average price target is $99.1 – 7% above the current share price. Most bullish is Crédit Agricole with a $109 price target, whereas Jeffries is most bearish with a $88 target. Our view: McDonald’s generates attractive returns. But with margins near historical peaks and the shares at 17.8 times prospective earnings, this great business is fully priced right now.
The numbers
Stock market code: MCD
Share price $92.32
Market cap: $91.8bn
Net assets (June 2011) $14.9bn
Net debt (June 2011) $10.2bn
P/E (current-year estimate) 17.8x
Yield (prospective) 3.0%
Directors’ dealings
There has been little direct buying or selling of shares by directors during the last year except for transactions related to company share plans. McDonald’s has very demanding share ownership guidelines, with the chief executive expected to hold six times his base salary in company shares. Recent purchases and sales are shown in the chart on the right; shares held by directors in the table below.
Dirctor and shares held
J Skinner: 153,059
P Bensen: 5,385
A McKenna: 43,770
D Thompson: 22,828
T Fenton: 33,503
J Fields: 36,554
D Goare: 16,186