Despite leading the fast food market in many global markets, McDonald’s (MCD: Charts, News, Offers), the world’s largest hamburger chain, has been trailing market leader Yum! Brands (YUM: Charts, News, Offers) in the crucial Chinese market. Yum’s rapid expansion of its flagship brands, KFC and Pizza Hut in particular, has allowed it to expand into 3,800 locations across the mainland, while McDonald’s has taken a distant back seat with 1,300 locations. Analysts and investors have repeatedly questioned McDonald’s reluctance to expand more aggressively into the Chinese market, and now the company has finally unveiled its battle plan – to open 700 new stores in China by 2013, bringing the total locations up to 2,000, while hiring 50,000 new Chinese employees, 1,000 of which will be university graduates placed in management training positions. This is the most aggressive move McDonald’s has taken in China since entering the Chinese market two decades ago, and directly aimed at curbing Yum’s growth.
Daily Chart
Much to McDonald’s chagrin, Yum’s KFC and Pizza Hut restaurants have become a familiar sight to any traveler in China, and their fast food products, heavily localized for the Chinese palate, have become a staple of life for modern Chinese. Yum has also opened East Dawning, a Chinese fast food restaurant, and is attempting to acquire popular Chinese hot-pot chain Little Sheep Group to further expand and diversify in local cuisine. It’s no wonder that McDonald’s, which has used international sales to offset domestic stagnation, is eager to slow Yum down before it marginalizes the fast food giant. Kenneth Chan, the chief executive of McDonald’s China, is optimistic about McDonald’s growth in China, stating that “McDonald’s is expanding faster in China than in any other market in the world, so this is the right time for talented individuals to join our winning team.” Like Yum, McDonald’s is exceptionally adept at adapting its menu to local cuisine, and its restaurant menus differ greatly between countries. In the past, McDonald’s saw the most promise in Japan, Australia and China – but in the aftermath of the devastating Sendai earthquake, subsequent tsunami and economic aftershocks, it is unlikely that the company will be significantly expanding into Japan this year.
Last week, McDonald’s reported earnings, with its EPS increasing to $1.15, or $1.21 billion, up from $1, or $1.9 billion, a year earlier. This edged out the analyst consensus by a penny. Revenue increased 9% for the first quarter, at $6.1 billion, compared to the $5.6 billion it posted the previous year. Same-store sales increased only 2.9% in the United States, but the Asia/Pacific, Middle East and Africa region posted a 3.2% increase, while Europe posted a 5.7% increase. A weak dollar impacted McDonald’s earnings, which are reported in U.S. dollars, as did rising commodity and raw material costs. The company expects food costs to increase at least 4.5% in the coming year, with a 4.5-5.5% increase in beef alone. McDonald’s is the largest purchaser of beef in the United States. Although McDonald’s was able to sidestep the rising commodity prices by focusing on higher-margin drink items, such as coffee, the company now faces fierce, experienced competitors such as Starbucks (SBUX: Charts, News, Offers) as their product lines begin to overlap.
McDonald’s currently trades with a P/E of 16.5, a bargain compared to the industry average of 20.4. Shares currently trade at the high end of its 52-week range of $65.31 to $80.94, and pay a quarterly dividend of 61 cents per share, a 3.1% yield. The company also has a 5-year projected growth rate of 18.38% versus the industry average of 6.76%.
Other News About MCD
McDonald’s Hires 62,000 U.S. Workers In One Day
McDonald’s goes on a hiring spree stateside as well.
McDonald’s Plans Big Expansion in China
McDonald’s readies for battle against Yum.
Other Stocks in the News
Everyone Loves China’s Baidu, Especially Robin Li
China’s top search engine is still rising, but is it sustainable?
OSX Growing Faster Than Windows? Not Really.
Is Apple’s growth in personal computing overstated?
Copyright 2011 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc.
No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions.
We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.
Other relevant articles you may like
Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
