McDonald's (MCD) Finishes 2011 on a High Note
On Tuesday, fast food giant McDonald's (MCD: Charts, News) handily beat analyst estimates on both earnings and revenue, yet shares slid more than 2% on fears regarding exchange rates and volatile commodity costs in 2012. For its fourth quarter, McDonald's earnings increased 11% to $1.33 per share, while revenue rose 10% to $6.82 billion.
Global same-store sales increased by an average of 7.5%. The United States posted an increase of 7.1% while Europe reported a gain of 7.3% - allaying investor concerns that stagnation in domestic markets would weaken its numbers. Meanwhile, growth in the Asia/Pacific, Middle East and Africa region grew 6.9%. This region, which includes several key emerging markets, has become increasingly important to McDonald's, accounting for 22% of the company's total revenue, up from the 14% it reported five years ago. However, the company's warning - that a weak euro and strong dollar in 2012 may translate into a loss of 16 to 18 cents per share - caused investors to sell off the stock, which had been flirting with all-time highs above $100 recently. Daily Chart
McDonald's is the world's largest fast-food chain with over 14,000 locations, and is considered a bellwether of the fast-food industry. Therefore, the struggles it faces will resonate throughout its industry peers. The company's stock has been considered defensive, as it holds up well in recessions, but its 30% price increase in 2011 has also made it an attractive for growth investors. Meanwhile, income investors remain attracted to the stock's 2.8% dividend. One of the key variables that frightens McDonald's investors is the volatility of commodity prices. The company forecasts commodity costs to increase by 4.5% to 5.5% in 2012, similar to 2011's average increase of 4.9%. McDonald's was forced to increase menu prices three times over the year in March, May and November, for a total of 3%, to keep pace with costs and preserve margins. Prices of key ingredients, such as corn and wheat, however, have stabilized and are not expected to increase significantly in 2012. Cautious analysts are also worried about possible higher taxes, interest expense, renovation costs, franchisee compensation and technology upgrades chipping into its margins. Last year, the company was able to shift its focus to its higher margin McCafe beverages in order to balance its lower margin food products. It also remodeled its restaurants to complement its focus on beverages and desserts in order to compete with pricier coffee shops such as Starbucks (SBUX
). So far, the company has renovated 45% of its interiors and 25% of its exteriors, an initiative that has caused some conflicts with franchisees who were required to share the costs. CFO Pete Bensen stated that McDonald's would "strategically take increases to offset some but not all of our higher costs." Bensen also noted that the company would use "a balanced approach to growing traffic and average check" when contemplating price increases. Most importantly, the London Olympics in 2012 are expected to boost McDonald's earnings significantly throughout the summer, offsetting any declines in Europe due to the relative safety of the British market, which does not use the troubled euro. The U.K., France, Russia and Germany are McDonald's strongest European markets. The Olympic-sized gains in the U.K. are also expected to offset losses previously incurred from its aggressive expansion into China as well as currency-related headwinds. Even after taking the title of top-performing Dow component in 2011, McDonald's is not overbought from a technical standpoint. Shares trade at a reasonable 17 times forward earnings with a 5-year PEG ratio of 1.9. However, shares could pull back slightly after its incredible run, giving investors another chance to buy a piece of this resilient stock. Other News About MCD McDonald's profit climbs 11% in 4Q
McDonald's beats the Street with solid earnings. On Strong McDonald's Earnings: Buy, Sell or Hold?
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Published on Jan 26, 2012
By Leo Sun