A miss for McDonald's

MacMiss. Not a supersized miss, but a miss over the seas and far away might as well be any size. Supersize, downsize, less in size. The actual quarterly miss was 2 cents earnings, the currency translation was exactly 2 cents, but I would think that the analyst community knows well enough about the currency ebbs and flows of a multinational business like McDonald's. 69 million people are serviced in 34 thousand restaurants across 118 countries each and every day. And more than 80 percent of all the McDonald's globally are owned and managed by franchise owners. So essentially these folks are their own bosses, but of course have to pay royalties to the parent company or to the super franchise owner. As per the company profile on the McDonald's website 59 percent of the stores are conventional franchises, whilst 21 percent are licensed to "foreign affiliates or developmental licensees". The balance, one in five stores, are owned by the company.


Oh, and just recently the company announced that they had issued a developmental licence for Vietnam. That is right, around 40 years after the Americans were persona non grata in Vietnam, they are back with one of their most recognizable landmarks. What is also great about the business is that they are able to customize menus for specific territories. No two regions are the same. What sells in India would probably never sell in the USA. In India there is a McVeggie, the McSpicy Paneer burger, in Singapore there is a Teppanyaki Chicken McGrill and in France you can have a Petit McBaguette. So, it is a case of horses (no meat of that sort though) for courses.


But we are getting distracted, here is the release: McDonald's Reports Positive Second Quarter 2013 Results. US sales were only a percent better. Europe was a struggle, good performances in Russia and the UK offset weaker German and French sales. Across to Asia, Australia, China and Japan were all laggards, whilst other markets did better. In the region, which is the Middle East, Asia Pacific and Africa! That would include ourselves. Sales for both the six months and comparable quarter were only two percent better, earnings for the second quarter was 6 percent better at 138 cents per share, for the half EPS was only 5 percent better to 264 cents. Expect less than double that for the full year, and a little over 6 Dollars EPS for the year after that. I would be surprised if the dividend was notionally increased toward the end of the year, for the last quarter.

McDonald's paid their first dividend 37 years ago in June. It was 2.5 cents. Adjusted for stock splits that would have been 0.062 cents. Nowadays it is 77 cents. But the amazing thing is that it has risen each and every year since that first dividend. Unbroken. Notwithstanding the Asian debt crisis, the recent financial crisis, and all the other different moments of angst that you can think of along the way, the dividend has continued to tick higher. There were many, and surely there are many still to come. But the company has continued to reward their shareholders. Price action? Well, as per the McDonald's investor relations segment: "Since going public in 1965, McDonald's has executed twelve stock splits. In fact, an investment of $2,250 in 100 shares at that time has grown to 74,360 shares worth approximately $6.6 million as of market close on December 31, 2012."


Wow. That is huge. But it is not 1965. It is 2013, where people are more conscious about their waistlines and portion sizes. There are at the same time more of us now than ever before, and populations should continue to grow. And McDonald's will continue to tweak their menus to adjust to the changing tastes of society. Check out the original menu, which I found through a Google search: Early McDonald's menus.


Valuations? Is the stock expensive? Well, it sank around two and a half percent to 97.58 Dollars. On the assumptions that they are likely to make somewhere in the region of 6 Dollars next year and 5.60 dollars this year, the stock trades on a multiple of 17.4 times current years earnings, and 16.25 next years earnings. For slow growth rates, I would hardly argue that is cheap. The dividend is important though. With a current yield of 3.15 percent, and a forward yield in the region of 3.3 percent (assuming 80 cents) that should at least give the stock a very decent floor to work with in the medium term. So no great shakes with regards to the share price, as growth rates slow. If you own them, continue to do so, I would think that if the stock were to get anywhere near 90 dollars, that would represent a great opportunity. For the time being, hold.