A safe harbor stock for now

How to handle McDonald's shares? Holding them for now is a safe bet.

By Jim J. Jubak Apr 22, 2010 2:21PM

Jim JubakWhat you want to do about McDonald's (MCD) in the short run -- say, the next six months or so -- depends on how optimistic you are about the economy and the stock markets.


The more optimistic you are, the less reason you have to hold McDonald's. The more you believe that the stock market might stall or correct slightly over the summer, and the more you're worried about economic growth slowing (but not stopping) in the second half, the more you'll want to hang on to your position. (For more on why you might want to hold onto this stock for the long run, see this post).


I fall, frankly, into the more pessimistic second camp. So, I'm going to keep these shares in Jubak's Picks.


The company's first-quarter earnings, announced Wednesday, make the decision to stay on board much easier. The story in the company's first-quarter earnings was simple: Growth in the U.S. is back.


McDonald's reported first-quarter earnings of $1.03 a share, seven cents above Wall Street's projections. Revenue climbed by 10.5% from the first quarter of 2009, to $5.61 billion. The Wall Street consensus looked for $5.52 billion.


Europe, with a 5.2% increase in comparable-store sales, and Asia/Pacific, Middle East, and Africa, with a 5.7% increase, once again led the company's revenue growth. But for the first time in many quarters, comparable-store sales increased in the U.S. as well -- albeit at just a 1.5% rate.


But the trend seems to be accelerating. U.S. comps were just about flat in January and February, but climbed 4.2% in March. And in its conference call, the company said April comps look likely to match or exceed the March numbers. 


Operating margins in the U.S. rose by 2.1 percentage points to 20.4%, on lower commodity costs, magnifying the effects on the bottom line of a return to growth in the U.S.


Global consolidated operating margins climbed 2.2 percentage points to 29.8%. Analysts expect that while commodity prices will climb in the second half of 2010, McDonald's will be able to cut operating expenses elsewhere to keep margins near that level.


So, how much do you want to pay for the McDonald's growth story? The stock now trades at roughly 14.5x forward earnings per share. That's cheap for McDonald's if you look at the historical comparisons: The lowest price-to-earnings ratio from 2000 to 2006 was 16.5x.


The consensus among investors, though, seems to be that McDonald's huge size means that growth must be slowing. For example, the company will open 150 new stores in China this year, but how much effect will that have on a company that does $23 billion in annual sales?


Wall Street analysts are pegging growth at 11.6% in 2010 and 9% in 2011. They estimate five-year annual growth at 9.1%.


The extra value in that growth, though, is its predictability in all kinds of economies. McDonald's now trades at roughly a stock market multiple. Given its rate of growth and the predictability of that growth, I think that's a bargain.


As of Thursday, I'm raising my target price to $74 a share (16.5x my forecast for 2010 earnings per share) from the current $72 a share target and am moving up that projection to July from September. As of April 22nd, the shares yielded 3.2%, and were trading around $70.69.


At the time of this writing, Jim Jubak didn't own shares of any stock mentioned in this post.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

114
114 rated 1
278
278 rated 2
474
474 rated 3
641
641 rated 4
639
639 rated 5
663
663 rated 6
640
640 rated 7
499
499 rated 8
284
284 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
COPCONOCOPHILLIPS9
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
KOGKODIAK OIL & GAS Corp9
CVXCHEVRON CORPORATION8
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.