McDonald's Stable at Neutral - Analyst Blog

We remain Neutral on McDonald's Corp. ( MCD ) with solid comparable sales (comps) momentum, expansion and accelerated remodeling on the one side, and commodity inflation, increased selling, general and administrative expenses as well as the expected currency headwinds for 2012 on the other.

The Oak Brook, Illinois-based company continues to deliver solid comps on the heels of product innovation, along with value menu offerings, McCafe premium beverages and a variety of core items. In the first nine months of the year, the company's breakfast sales have grown 5.1%. Internationally, McCafe is focused on hot beverages at present. Also, the company has identified a number of markets to test or add Real Fruit Smoothies and Frappes over the next few years, starting with Australia.

McDonald's plans to spend $2.9 billion in 2012, the major share of which will be invested in Europe followed by the U.S., Asia/Pacific, Middle East and Africa (APMEA)and other countries/corporate. McDonald's raised its expansion target to more than 1,300 restaurants in 2012 up from 1,100-1,200 units for 2011. In addition, there will be 2,400 global remodeling jobs in 2012 up from 2,200 this year. Next year, remodels are expected to provide a comp lift of 5%-6%. Although economic challenges linger in Europe due to sovereign debt-crisis, the consistency in McDonald's performance supports its confidence.

McDonald's has been resorting to menu pricing globally to counter cost pressures. The company increased the price by 1% in March and 1.4% at the end of May in the U.S., and will likely take additional increases in the near term as food-at-home inflation is rising faster than food-away-from-home.

However, U.S. food cost inflation is present there to partially offset the positive fundamentals. Furthermore, in 2012, McDonald's will increase its selling, general & administrative expenditure by 7% to account for its biennial franchisee convention, the Summer Olympics and unusual expenses to support technology initiatives including the POS rollout in Europe, which will cost its earnings by 5 cents per share.

Additionally, the company will likely face unfavorable currency movements, as opposed to 2011, affecting its earnings per share minimally. McDonald's currently retains a Zacks #3 Rank (short-term Hold rating). The company's competitors include The Cheesecake Factory Inc. ( CAKE ) and Yum! Brands Inc. ( YUM ).

CHEESECAKE FACT ( CAKE ): Free Stock Analysis Report

MCDONALDS CORP ( MCD ): Free Stock Analysis Report

YUM! BRANDS INC ( YUM ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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