After a strong first quarter earnings report in 2009 McDonald’s future looks promising. A weakening US Dollar coupled with overseas growth will make the company a winner going forward. A consistent dividend of 3.30% also rewards shareholders in it for the long haul.
McDonald’s has come under a lot of scrutiny so far in 2009. Many analysts negatively spoke about the company’s ability to sustain growth during one of the worst economic environments in recent history. Further talk about a strengthening dollar also contributed to widespread pessimism among analysts. All of that may have changed as the global economy now shows signs of stability and the dollar weakening in recent trading. The new operating environment could allow McDonald’s to thrive in the next decade.
Lower fuel costs at the pump have also eased concerns over discretionary income among McDonald’s patrons. Although the overall global economy has been weak, the company has been fairly resilient. This is in part due to a "trade down" in dining choices by consumers. When people can no longer afford expensive food they trade down to McDonald’s low priced menu offerings. This point was exemplified in 2008 when McDonald’s took away large market share from rival Starbucks. Consequently, Starbucks stock price got hammered while McDonald’s was one of the few stocks ending the year with gains.
“McDonald’s continues to deliver a relevant restaurant experience that provides consumers with a broad range of quality menu choices, affordable prices and unmatched convenience. Our underlying business performance remains strong. " Chief Executive Officer, Jim Skinner
In its most recent earnings report McDonald’s (MCD) grew worldwide same store sales by 4.30% . This was while revenues dipped to $5.08 billion in 2009 from $5.61 billion the prior year. Now you might be wondering how same store sales can increase while total revenue decreases. Currency exchange rates play a major role in this phenomenon. Since McDonald’s is a United States based company, they must report financial figures in US Dollars. When the dollar increases, revenue earned in foreign countries is worth less when exchanged into dollars.
"In constant currencies, first quarter results reflect higher revenues, operating income and earnings per share over the prior year.” Chief Executive Officer, Jim Skinner
With more than half of McDonald’s total revenue coming from outside the United States it is easy to see how a weaker dollar helps earnings. Revenue generated in foreign countries gets repatriated at a better rate of exchange. With the United States Federal Reserve lowering interest rates to add liquidity to the credit markets and banking system, the dollar is sure to depreciate in value. This is a great thing for companies like McDonald’s trying to grow globally. Now when McDonald’s repatriates money out of currencies like the Euro and Yuan they will get more dollars in return.
Everything isn’t completely golden at McDonald’s though. One major challenge the company faces is integrating menu options over culturally diverse nations. Menu offerings from the United States don’t necessarily work in other parts of the world. McDonald’s will have to cater overseas restaurants to local tastes, integrating menu options to suit unique cultures.
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McDonald’s stock offers a compelling, yet risk averse way to play the global growth story. While the United States has over 300 million people countries like China, Brazil and Japan have several billion. If McDonald’s can execute its growth strategy overseas like it did in the United States early on, you could see a major rise in stock price. Although this growth strategy may take five or more years to execute, the reliable 3.50% dividend allows you to get paid for waiting.
The stock price (MCD) has made a run off a lower support trend-line (see chart) and the 100-day moving average. Starting a position in the $53.00-$56.00 price range seems to be a good entry. A depreciating dollar, global expansion and lowered fuel costs are all reasons to be excited about McDonald’s. Furthermore, they have proven they can successfully operate in the worst economic environment in recent history. Although McDonald’s (MCD) isn’t the sexiest of stocks, we believe it will reward patient shareholders handsomely.
Disclosure: Author holds a long position in McDonald’s (MCD) common stock.
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