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McDonald's Thrives as Consumers Get Cheap

Stocks in this article: YUM BKC

When the going gets tough, people get cheap. McDonald's (MCD), home of the dollar menu, has benefited more than any other fast-food restaurant from the faltering economy.

The company reported impressive October results, overcoming concern that a stronger dollar would hurt international business. Global same-store sales rose 5.5%, and U.S. and Europe sales increased 5.3% and 9.8%, respectively. A revamped menu and attractive prices outweighed health concerns as consumers had less money in their pockets.

Since the health-food craze began in the 1990s, McDonald's has faced criticism for its unhealthy menu, culminating in the documentary movie "Super Size Me" in 2004. However, the restaurant remains a safe haven during turbulent times because of its convenience and affordability. The stock may extend its five-year advance if the economy continues to recede.

During an economic downturn, consumers cut costs, and McDonald's benefits from that. Many people will continue to eat out during a recession, but they are likely to trade down to cheaper restaurants. McDonald's also is a substitute for home cooking, as consumers avoid high supermarket prices in favor of the dollar menu for a cheap and effortless meal.

McDonald's recently received publicity for its standout performance in the restaurant industry, but its stock remains undervalued based on peer valuation. MCD trades at a discount based on price-to-earnings and price-to-book. More importantly, the stock has an earnings growth rate of 169.38, which dwarfs the industry average of 64.66. It carries a "buy" rating from Ratings.

McDonald's revenue rose 6.2% to $6.26 billion in the third quarter. Net income increased 11.2% to $1.19 billion. Burger King (BKC) said revenue advanced 12% in the three months through October, though earnings missed estimates due to volatile commodity costs.

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