Despite Europe's Bite, McDonald's Showing Growth

NEW YORK (Trefis) -- Europe is the biggest segment for McDonald's (MCD), with more than 40% of its revenue derived from the region.

Due to the European debt woes, the stock has taken a beating with a 15% decline so far in 2012. However, a deeper look at the facts points to a situation which is not as bad as most investors think.

First, due to the franchising nature of the restaurant chain (more than 80% of McDonald's restaurants worldwide are franchised), the more accurate way of judging a region's importance is its percentage contribution to operating profits or total franchisee sales.

Since the franchisee sales by region are not available for McDonald's, we consider operating profit. Due to a higher proportion of company-operated restaurants in Europe, the region's revenue contribution is higher than its operating profit contribution.

Although Europe contributed close to 40% to the total revenue in the first quarter, it contributed less than 35% to the total operating profits. The U.S. continues to be the highest profit-generating region for the company with around 45% contribution to profits.

Since McDonald's performance in the U.S. has been quite strong, we think the stock deserves a higher valuation than the current market price. For the first five months of 2012, the U.S. comparable sales growth has been an impressive 6.8%. Even Europe, for that matter, has not performed badly given the uncertain macroeconomic environment currently. Year-to-date, the comparable sales have grown 4.2% in the region.

Sure, the comparable sales growth has declined in the past couple of months, but it is only fair that for a fast-food chain with more than 33,000 restaurants worldwide we look at data points over a time scale more than one or two months.

Thus, it is the health of the U.S. economy rather than Europe's that is more pivotal for McDonald's performance. Moreover, the last three to four years illustrate that McDonald's can perform strongly even in a recessionary environment.

Steps Taken by McDonald's

Of course, consumers don't automatically flock to McDonald's outlets. The fast-food chain has worked hard to lure new customers and at the same time ensure existing customers keep coming back. Adding items to the menu is one way.

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