It recently posted its latest quarterly earnings, missing expectations by a penny, and its shares declined by 2%. But wait- that isn’t all you need to know! Here’s the big picture:
Ups and downs
In its last quarter, McDonald’s Corporation (NYSE:MCD) consolidated revenues increased by 1% to $6.6 billion. Net operating income remained unchanged at $1.27 billion. McDonald’s earnings per share are up $0.03 to $1.26 as compared to the year ago quarter.
Globally, McDonald’s Corporation (NYSE:MCD) comparable sales fell by 1%. The company’s US comparable sales also declined by 1.2% year on year while operating income went down by 3%. However, McDonald’s recent initiatives such as new items in its menu, store restructuring, and success of its Dollar Menu paid out. Despite the decline in sales and income, McDonald’s market share in the US actually went up in the last quarter.
In Europe, sales suffered due to the prevailing economic turmoil. Comparable sales declined by 1.1% from the previous year. Operating income was up 1%, driven by sales in Russia and UK. McDonald’s plans to increase its market share in the region by expanding its store network, increasing working hours, and offering new and improved products.
Once upon a time in China
Recent slowdowns in China and Japan have affected McDonald’s sales in Asia Pacific, the Middle East, and Africa.
Comparable sales fell 3% and operating income 1% from last year. It seems like the Golden Arches didn’t have much to gain from Yum! Brands, Inc. (NYSE:YUM)‘ recent fallout in China. Yum! Brands, Inc. (NYSE:YUM)-owned KFC was involved in a health scare in China, followed by a bird flu scare. As a result, Yum! Brands, Inc. (NYSE:YUM) posted a 6% decline in its comparable sales in China in the last quarter. Yum!’s quarterly operating profit in both China, as well as the US, fell by 5%.
The young ‘uns
In the face of sluggish global demand, weak consumer confidence, and a payroll tax hike, McDonald’s Corporation (NYSE:MCD) first quarter numbers look pretty good, considering. They show that the world’s biggest burger chain has its game sorted out.
However, all is not as hunky dory as it seems. McDonald’s does, for instance, need to redefine its image and adopt the more popular “fast-casual “style followed by, say, Chipotle Mexican Grill, Inc. (NYSE:CMG). This is if it wants to woo the new generation of fast food eating crowd. Cheap, as McDonald’s offerings are, will always remain in demand. The question worth asking, is “will it suffice?” Sadly, the answer is no. McDonald’s must, in order to maintain its position in the market, tweak its original business model (cheap and greasy value food) to increase its profit margins.
For instance, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s healthier fast food is very popular with the younger crowd and the company is riding high on the demand for its products. Unsurprisingly, the fast food chain, known for its great tasting burritos, has been doing great for the past few quarters. The Mexican grill chain has been reporting gains in revenue and income while its shares have been climbing higher. The company also reported its last quarter results this week. Not surprisingly, it gained 13.4% in revenues from the previous year, with a 1% increase in comparable sales. Its diluted earnings were a massive 24.4% up at $2.45 per share.
Lately, McDonald’s Corporation (NYSE:MCD) has been making some progress in the right direction. For example, when McDonald’s launched the McWrap, many touted it as a “Subway buster”, since it uses fresh vegetables and a variety of sauces, not unlike a Subway sandwich. And McDonald’s Corporation (NYSE:MCD) did gain in terms of revenues. The company just needs to keep on doing so, by launching new (and healthier) products and finding innovative ways to sell them. Remodeling of its stores and opening of new stores will also help.
If it can manage to pull back the younger crowd, it’ll have little cause for worry.
Why I like it
One of the reasons why I like McDonald’s is that it has a policy of returning a large proportion of its cash flow to investors. It is one of those solid, low-risk companies you can rely on. In the last quarter, the company returned $1.1 billion to its investors via share buybacks and dividends. Currently, McDonald’s Corporation (NYSE:MCD) has a dividend yield of 3.10%.
Further, the share is trading at a relatively low P/E of 18.60. The industry P/E is 21.40 while Chipotle Mexican Grill, Inc. (NYSE:CMG)’s is an astounding 41.90. At the current rate, this makes McDonald’s a cheap buy.
The article Watch Out For This Fast Food Company! originally appeared on Fool.com and is written by Sonam Chamaria.
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