Is McDonald’s Worth Buying?MCD) announced second quarter ended June 30, 2016 total revenue of $6.3 billion, down 4 percent year-over-year from $6.5 billion during the same period last year.
McDonald's declared second quarter of 2016 net income of $1.1 billion or $1.25 per diluted share, down 9 percent year-over-year from $1.2 billion or $1.26 per diluted share in second quarter of 2015.
The global fast foods restaurant company reported continued year-over-year decline in both its top and bottom lines primarily due to $230 million of key charges, comprising mainly of non-cash damage charges suffered during the quarter linked to McDonald’s continuing G&A and refranchising efforts coupled with the result of the relocation of McDonald’s headquarters.
Growing in the right areas
The largest global restaurant chain recently declared same-store sales expansion that somewhat missed the key analyst’s forecasts primarily driven by the general expectation that the fast-food industry in the US is soon slipping into recession.
Moreover, the key fast-food competitors like Wendy’s Co. (WEN) is also offering attractive promotions and discounts to expand sales that is further putting McDonald’s margins under pressure.
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The same-store sales growth for McDonald’s weakened to about 1.8 percent in the previous quarter domestically as against 5.4 percent growth during the last quarter. However, the key analysts had projected an expansion of 3.2 percent during the period.
McDonald’s is bound to suffer the repercussions of expectations about the global fast-food industry slipping into recession that has resulted in the company losing its customers and continued weakening of the customer footfall in its restaurants and franchises.
The worldwide fast-food chain is spending hugely on its comeback initiatives while selling the company-held restaurants and shifting its headquarters to the strategic downtown Chicago location from the suburbs. However, the strategic and significant sell-off of the company-held restaurants to planned franchises is declining the overall sales volume.
McDonald’s recently decided to grow its all-day breakfast choices by adding several attractive sandwiches and McGriddle options to its menu. This growth effort is targeted towards expanding sales while allowing it to emerge strongly from the ongoing fast-food industry downturn.
The strategic move of McDonald’s to attract customers by offering new and innovative fast-food choices while increasingly selling-off its company-owned restaurants to franchises is believed to increasingly support the company in sustaining its daily expenditures while allowing it to strategically execute on its long-term growth plans by successfully beating the ongoing concerns about the global fast-food industry slowdown.
McDonald’s consolidated shareholder returns for the past five years from 2010 till 2015 have been extremely competitive and industry-leading compared to the global S&P 500 index and Dow Jones Industrials measurement parameter that signifies the continued focus of McDonald’s on offering attractive shareholder returns while continuing to implement superior growth plans for delivering sustainable long-term company growth by beating the expanding competition in the industry.
Importantly, McDonald’s has returned a total of $4.1 billion of invested capital to the key stakeholders in the form of dividends and strategic share repurchases and thus, bringing the total shareholder returns to $24.4 billion as compared to the company’s targeted shareholder return of approximately $30 billion for past three years ending 2016.
McDonald’s seems keen on returning a majority of the invested capital to the key stakeholders in form of dividends and strategic share repurchases which is highly appealing for the investors.
Overall, the investors are advised to “Buy” equity in McDonald's Corp. considering the company’s significant near-term and longer term growth prospects with PEG ratio of 2.26. The profit margin of 18.84% is extremely impressive. However, McDonald’s needs to optimize its debt-burdened balance sheet with significant total debt of $26.01 billion against weaker total cash position of $3.13 billion only, restricting the company to make future growth investments.
Published on Sep 12, 2016By Vinay Singh