In June of last year,NYSE
, was a solid buy. This came despite the 11% pullback leading up to
thatcall , the fact that the company had warned upcomingearnings
would tumble about 6%, and that Goldman Sachs had changed its
opinion of McDonald's from "buy" to merely "neutral."
To be fair, thestock is now trading about where it was then, so
the "buy" call hasn't bore fruit yet. But a handful of new factors
has materialized that continue to convince me this iconic stock is
That was then
The seven months since that detailed look at McDonald's haven't
been easy.Shares have moved as high as $94.09 and as low as $83.31
before finding the $92 level again. The prods for all that
volatility were mostly earnings-based, some good and some bad.
As expected, when McDonald's posted its second-quarter earnings,
they were lower by 2.2%. Even more alarming was per-share profits
of $1.32 -- rolling in 4.3% lower than average estimates of $1.38.
Weak demand in Europe and rising food costs were deemed the primary
culprits. Remember, the drought of 2012 was well underway by that
time, driving the price of meat, corn and wheat much higher.
Then in the third quarter, the organization also reported a 3.5%
dip in earnings on a modest slide inrevenue . It was quite
un-McDonald's-like, even ifcurrency fluctuation -- which is
completely out of the company's hand -- was the root cause of the
contracted numbers. Also with the third-quarter earnings report,
McDonald's reiterated it was dealing with improving competition and
Europe's tightened consumer purse-strings.
The company missed two earnings estimates in a row after three
straight years of beating or meeting those numbers. Even worse, the
two consecutive declines in year-over-year quarterly income had
shareholders understandably worried.
This is now
The good news for McDonald's today is the nagging problems it was
facing in the middle of 2012 have been mostly abated.
For starters, drought-raised corn prices are back to more
palatable levels. They're still high at levels around $7.24 per
bushel, but well off of August's peak price of about $8.50. And
corn prices are still in a broad downtrend.
Europe's self-imposed austerity mindset is also fading. The
International MonetaryFund 's Chief Christine Lagarde has recently
noted that it sees the eurozone growing rather than contracting in
2013. Europe's Economic Sentiment Indicator ticked higher for a
second month in a row in December, after falling each month since
January of last year. The euro hit an 11-month high the second week
of January, underscoring how traders are rebuilding their faith in
the European Union'seconomy .
As for improving competition from the likes of
Burger King (
, McDonald'swill do what it always does: Hit them head-on with
promotions and new menu items. The restaurant's new chicken wings,
first tested in Atlanta and now Chicago, have been well received so
The transition from troubled times to better days for McDonald's
could already be underway. The company posted 2012's fourth-quarter
earnings on Jan. 23, with anet profit fo $1.38 per share, up from
$1.33 earned in the same quarter of the previous year. Analysts
were looking forearnings per share (
) of $1.33.
With theupside surprise in earnings, McDonald's looks well
positioned to begin a recovery in 2013. While investors are still
cautious when it comes to the fast food company, they may want to
also respect that fact that it's still McDonald's: the company's
worst-case scenario is still better than many companies'
Risks to Consider:
Although McDonald's is in the same boat as Wendy's and Burger
King when it comes tocommodity costs, it still has an oversized
reliance on Europe, where it generates 40% of its revenue. We've
already seen that if Europe falters, then McDonald's does too.
Action to Take-->
McDonald's has a place in nearly every value-oriented and
income-oriented portfolio, even if the last year or so has been a
weak time for the stock. Despite worries that the company would hit
some major speed bumps in 2012, sales and income have still been
growing. While it may be unfair to expect the stock to hit an
annual growth rate of 30% or more this year, it would be fair to
expect a climb of 10% to 20% during the course of 2013. That's the
pace at which it's been moving since 2003. Throw in the
consistently-growingdividend and ayield of almost 3.5%, and
McDonald's is still an ideal all-around holding. It just needs time
to make good on its potential.
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