Value and convenience give food giant McDonald's competitive edge
Published 22/07/2010 | 05:00
In this, the fourth article in the series, we take a look at another US global consumer franchise company, McDonald's.
With 32,500 restaurants in 117 nations and annual system-wide sales of $57bn (€44.5bn), McDonald's is the world's largest food service operator.
The US accounts for 35pc of revenues, Europe 41pc, Asia/Pacific, Middle East & Africa 18pc and other regions the remaining 6pc. Its sheer scale, convenience and value offering is a knockout combination providing it with recession-proof earnings and a true competitive advantage.
These attributes not only allowed the company to recover from a decade of mismanagement from the mid-1990s but to grow earnings, cash flows and dividends at a rapid pace since the turnaround gathered momentum in 2004.
The turnaround started in 2002 when management halted the previous policy of adding 'restaurants to customers' and focused on adding 'customers to restaurants'.
The results were dramatic. New store openings were slashed and an emphasis was placed on customer satisfaction, which led to the development of new, convenient and innovative menu offerings; improved hygiene; and increased speed of service.
System-wide revenues have increased by 37pc from $41.5bn in 2002 to $56.9bn in 2009 and the group now serves 60 million customers a day compared with 46 million a day in 2002, with only a 4pc increase in system-wide restaurants.
With annual cash flows of $5.7bn, $2bn of short-term cash reserves and net debt of $8.5bn there is no financial risk in McDonald's.
The shares trade on 16 times earnings, which is a 15pc discount to the long-term average price-to-earnings ratio of 19 that investors have afforded the shares in the past (see chart). The defensive growth nature of its earnings profile is rare and, in that regard, a price-to-earnings ratio of 16, which equates to an earnings yield of 6.25pc, represents good value when you consider that the US 10-year government bond only yields 3pc.
While the surge in growth following the turnaround may be over, same store sales growth remains positive, further expansion opportunities lie ahead and strong cash-flow generation underpins the ongoing earnings-enhancing share buy-back programme.
McDonald's looks capable of sustaining mid-to-high single-digit earnings growth that, together with a dividend yield of 3.2pc, should underpin 9pc-10pc annual returns to shareholders over the medium term.
Next week's article focuses on a comparison of value between government bonds and the US global consumer franchises.
This series is being written by Rory Gillen, founder of www.investRCentre.com. A copy of all five articles will be available, in PDF format, at the end of the series by emailing info@investRcentre.com