McDonald's Stock Packs Happy Meal

Restaurants are classified as "consumer discretionary" because customers can easily discontinue their patronage during a recession. McDonald's ( MCD) hasn't been adhering to that model.

Instead, the fast-food behemoth has been acting more like a member of the "consumer staples" sector: companies, like supermarkets, that sell everyday needs whose sales remain relatively stable, even during recessions.

It seems that even when squeezed for cash by the current recession, parents are finding the financial wherewithal to keep their kids in Happy Meals. Possibly also helped by commuters who are passing up pricier eateries for "Mickie D" lunches, McDonald's worldwide "comparable location" sales at its restaurants increased 1.4% in February compared with a year earlier. Because last month contained one fewer day than February of 2008, a leap year, sales adjusted for the calendar difference were 5.4% above a year earlier. January's global comparable sales leaped 7.1%.

The consensus forecast among securities analysts who track McDonald's is that net earnings per share will advance 2.4% for the fiscal year ending in December and climb 9.7% next year.

Some investors have taken notice. With the Dow Jones Industrial Average grabbing headlines for its slide this year, McDonald's stock is the No. 1 performer on the benchmark index during the past 12 months, falling only 0.2%.

As can be seen in the accompanying table, TheStreet.com Ratings' quantitative-evaluation model assigns McDonald's a "reward" mark of "A" and a matching "overall" grade. Only two stocks currently have earned higher overall grades than MCD, with only 39 better in the "reward" category.

Of 5,400 stocks with "risk" grades from TheStreet.com Ratings, only 16 have better marks than the hamburger giant.

McDonald's price-to-earnings multiple of 13 and a fraction, based on this year's estimated results, is in line with firms that are expected to hold up during the economic downturn. The same is true of its current dividend yield of 3.76%, which is comparable to the S&P 500's yield of 3.57% and surpasses the return on 30-year Treasury bonds.

The stock advanced steadily from the low teens in early 2003, as the economy climbed out of the last recession, to the mid-$60s last summer. It then backed off to its current range in the low $50s.

In a perverse way, McDonald's has been used recently as a gauge of market value. When General Motors ( GM) crumbled to the $3 range, wags on Wall Street asked whether it was wiser to buy a Big Mac or a share of the auto giant. Then, when one-time banking titan Citigroup ( C) collapsed toward penny-stock status, they asked if its shares should be listed on McDonald's dollar menu.

But in recent months, McDonald's sales figures indicate that consumers have been showing a distinct preference for Big Macs over GM's stock or shares in Citi. Investors looking for a stock with an attractive dividend yield priced at a reasonable multiple of earnings should take a look at McDonald's shares.

McDONALD'S: LOW-PRICED MEALS AND A LOW-RISK STOCK
Company
MCDONALD'S CORP
Ticker
MCD
Industry
Hotels, Restaurants & Leisure
TheStreet.com Ratings Reward Grade
A
TheStreet.com Ratings Risk Grade
B
TheStreet.com Ratings Overall Grade
A
TheStreet.com Ratings Recommendation
Buy
Recent price
52.25
Market Cap ($Mil.)
58,186.7
Total Assets ($Mil.)
28,461.5
Total Debt ($Mil.)
10,217.8
Latest Fisc. Yr. Revenue ($Mil.)
23,522.4
Cash Flow from Operations ($Mil.)
5,917.2
Earnings Before Interest & Taxes ($Mil.)
6,283.7
EPS - Latest Fiscal Year
3.76
EPS - Curr. Year Consensus
3.85
EPS - Next Yr. Consensus
4.23
Price/Book Ratio
4.4x
Ret'n on Equity (%)
32.2
P/E - Current Year
13.6x
P/E - Next Year
12.4x
Dividend Yield (%)
3.83
Source: TheStreet.com Ratings (Data as of 2/27/2009).

For an explanation of our ratings, click here.

Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.

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