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Necessity Forces McDonald's to Stand by China Meat Supplier

Stocks in this article: YUMMCD

McDonald's, on the other hand is sticking by OSI for now, saying. "We have been in direct contact with OSI's global leaders; as an added assurance of uncompromised safety, they are sending their top food safety experts to China to provide expertise on operations."

During its earnings conference call, McDonald's Chief Executive Officer Donald Thompson said "We do have audits of our suppliers. In this case, we do feel that we were a bit deceived relative to one of these plants, so we're clearly looking at that."

McDonald's is viewing this event as a breakdown in its own safety auditing and is looking to learn from the experience and as well strengthen its controls. The company is taking the approach that consumers in China will accept its apology. There is more to the story, however.

OSI is based 25 miles from the Chicago headquarters of McDonald's. OSI has been and continues to be a major food provider to McDonald's globally. So severing ties, no matter how bad the PR is at the moment, is not feasible. McDonald's is close to opening its own state-of-the-art food facility in the province of Henan so until that occurs it is forced to use other Husi Food plants around China.

Read More: Ho-Hum, Another Boring Day of Little Volume in the Markets

Necessity, not bad press, is the reason for the differing approaches to the scandal. McDonald's needs OSI, Yum! does not. Time will tell which approach pays off.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates MCDONALD'S CORP as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MCDONALD'S CORP (MCD) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MCD's revenue growth has slightly outpaced the industry average of 6.8%. Since the same quarter one year prior, revenues slightly increased by 1.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • MCDONALD'S CORP's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MCDONALD'S CORP increased its bottom line by earning $5.56 versus $5.36 in the prior year. This year, the market expects an improvement in earnings ($5.74 versus $5.56).
  • 38.77% is the gross profit margin for MCDONALD'S CORP which we consider to be strong. Regardless of MCD's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, MCD's net profit margin of 19.31% compares favorably to the industry average.
  • The change in net income from the same quarter one year ago has exceeded that of the Hotels, Restaurants & Leisure industry average, but is less than that of the S&P 500. The net income has decreased by 0.7% when compared to the same quarter one year ago, dropping from $1,396.50 million to $1,387.10 million.
  • In its most recent trading session, MCD has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.

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