McDonald's bumbles through

Companies time! This time it is one of the best known brands on the planet, McDonald's, synonymous with cheap and lightning quick delivery of food, fast in every sense of the way. I wonder if the fifth consecutive quarter of disappointing sales has something to do with the economic downturn and then the subsequent upturn again. When times are tough, diners look for a cheaper alternative will flock to something they know. McDonald's performed really well from a sales point of view through the financial crisis, but has had a very tough last 18 months.


And expectations are for the next 18 months to continue to look tough. So the answer always as a shareholder is, how much patience can I have at a time like this when the balance of the equities market looks like a "better place" and that is costing you, from a time point of view. Opportunity cost. It is by definition one of the simplest economic terms, I think. The loss of potential gains from another investment when another investment is chosen.


I think that the other issue that has plagued McDonald's would be obesity pushback. This was one of the reasons why we dropped Coca-Cola in favour of Starbucks, because early stage regulators were trending towards soda taxes, Michael Bloomberg in New York state did this. The difference however is that McDonald's have the ability to tweak their menu.


In fact I see some people have suggested too many tweaks and perhaps the company should return their focus to a slimmer menu. The ability however of McDonald's to offer people what they want (corn, wraps, apple slices) exists and is easy enough to implement. And the ability to set menus for regions and countries also exists, our menu is very staid when compared to many other places around the world.


In Malaysia you can get porridge for breakfast, this is how it is described with the line ending, just like moms cooking: "Juicy chicken strips in mouth-watering porridge, garnished with spring onions, sliced ginger, friend shallots and diced chillies." I cannot say that I have ever had this before, or would I eat it for breakfast. But the locals, a Bubur Ayam (McD style) is a favourite breakfast dish. In India you can get a McSpicy Paneer burger, deep fried paneer for the burger patty option for many, many vegetarians in India.


119 Rupees for a McSpicy Chicken in India, that is roughly 1.92 dollars, or 21.13 Rand. A small Cajun Chicken meal, which includes the burger here in South Africa is 36 Rand. That would include a small fries (which costs 49 rupees in India, 8.66 ZAR) and a small coke (at 46 rupees, 8.13 ZAR). So we are comparable to India, notwithstanding the fact that per capita basis, we dwarf them.

OK, back to McDonald's results, these are for the full year to end 2013, as well as of course the fourth quarter. For those who suffer from quarteritis, they beat by a cent on earnings and missed on revenue, by a touch. For the year the company reported revenue in Dollars of 28.105 billion and profits of 5.585 billion, both increasing by a meagre 2 percent. On a per share basis, McDonald's grew by four percent to 5.55. The quarterly dividend is 81 cents, that translates to 324 cents a year. On a simple fundamentals basis, McDonald's (at 95.32 Dollars) trades on a 17 multiple with a 3.4 percent dividend yield. Does it deserve to trade on such a demanding multiple, bearing in mind of course there is a serious yield underpin. You see, in a still very low yield environment, the yield underpin matters. That is why I think the share price is where it is currently.


But do not think that this is NOT a growth company, next year they plan to open between 1500-1600 restaurants and refurbish around 1000. Remembering that 70 million customers in over 100 countries at 35 thousand locations around the world eat McDonald's. Multiply that by 365 and you get around 25 and a half billion visits a year. That means around three and a half visits per person per annum. Wow. Astonishing. But at the same time, if you do simple math, they do not really make that much money per customer (refer to the revenue number above, bearing in mind that there are many franchised stores).


So what to do? I think that the closing comments from the release, from the CEO Don Thompson point to what we should do, continue to be patient: "As we begin 2014, global comparable sales for the month of January are expected to be relatively flat. While near-term challenges remain, we are intent on strengthening our brand to further differentiate McDonald's and become an even bigger part of our customers' lives. We have an outstanding brand, the best franchisees, suppliers and employees in the industry and distinct competitive advantages along with the right strategies to deliver sustained, profitable growth over the long term."


Yes. continue to hold. If they get to 90 (I do not really anticipate that) they will be in buying territory. Regulatory changes to their food offering a risk, we will continue to watch and see if the company menu remains relevant.