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TheStreet Open House

Bargain Hunting: McDonald's Stock Is on the Value Menu

NEW YORK (TheStreet) – McDonald's (MCD), the world’s largest fast-food chain, is not having a great year. And things may get worse before they get better.

The company reported on Friday that July same-store sales in its Asia Pacific, Middle East and African markets fell 7.3%. Wall Street was looking for a decline of 0.2%. The region accounts for about 10% of McDonald's global sales.

The company also reported that same-store sales in the U.S. declined 3.2% during the month. Unless these figures rebound dramatically, McDonald's will likely post a drop in revenue this year for the first time in more than a decade.

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The stock was trading Monday morning at $93.66, down about 10% from its all-time high of $103.78, which was set in March.  The shares have lost 3.4% year to date, compared with a 5% gain for the Standard & Poor's 500 Index

At current levels, the stock is a bargain. It trades at about 17 times last year's earnings, compared with the S&P's price-to-earnings ratio of 19.2. Plus, McDonald's is expected to return $5 billion to shareholders this year through stock buybacks and dividends. With the stock's dividend yield of 3.2%, there is minimal risk to owning the shares.

McDonald's problems in Asia stem from reports that a supplier allegedly relabeled expired meat in China. McDonald's could not be reached for comment.

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Smart investors aren't worried, however. McDonald's isn't going anywhere. The company has responded to the food scare by limiting menu items to mitigate the threat and ensure that its food is safe to eat.

McDonald's faces other challenges, as well, including the trend of consumers opting for healthier food, which has helped McDonald's spinoff Chipotle Mexican Grill (CMG).

To combat these challenges, McDonald's must come up with new menu items and focus on the consumer experience. That is part of the company's rich history and would help it stabilize same-store sales, which, along with returning cash to shareholders, should boost the stock.

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

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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 A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MCDONALD'S CORP (MCD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, expanding profit margins, largely solid financial position with reasonable debt levels by most measures and notable return on equity. 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 5.8%. 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 ($5.63 versus $5.56).
  • 44.52% 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.
  • MCD's debt-to-equity ratio of 0.96 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.46 is sturdy.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, MCDONALD'S CORP's return on equity significantly exceeds that of both the industry average and the S&P 500.

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