McDonald’s Corporation (MCD): Why You Should Own This Fast Food Chain

Only hope: franchise growth

From an investment perspective, the only reason to like Wendy’s or Jack in the Box more than McDonald’s is for their growth prospects. All three chains have robust franchise programs that allow them to expand rapidly with little additional investment. These programs also provide the firms with stable, annuity-like cash flows that enable them to earn relatively stable margins.

However, as the free cash flow margin chart shows, Wendy’s and Jack in the Box have not yet reached the stability that McDonald’s has reached. Jack in the Box stores are located in just 21 states, which means the chain has a long runway for growth. Meanwhile, the company’s Qdoba brand has a first-year royalty incentive that is attracting hoards of well-qualified franchisees.

Wendy’s, on the other hand, has already penetrated most major markets in the United States, but has hardly even begun to expand internationally. Increased efforts in international markets may push it over the hump and allow it to earn high and stable margins like McDonald’s.

Bottom line

McDonald’s Corporation (NYSE:MCD) is the market leader in virtually every market in which it operates. The company continues to roll out high-margin products, like McCafe specialty coffee, that increase the gap between it and its competitors. The company will continue to earn strong cash flows, even during economic downturns, unless management makes a major mistake. As a result, investors looking for protection from another recession should give McDonald’s a closer look.

The article Why You Should Own This Fast Food Chain originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends McDonald’s. The Motley Fool owns shares of McDonald’s. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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