Thursday, December 18, 2008

McDonald’s: Having It Their Way

McDonald (MCD) may be as well positioned as any company I can think of to prosper during these difficult times. The reason is the effects of three forces that all appear to be driving business to their stores.

  1. Trading down effect: It is clear that Wal-Mart (WMT) is winning over a bigger segment of the populace in these tough times with their low prices. I believe the same thing is going on at McDs. Eating out is the American way, but I’m betting that more and more Americans will be eating a little lower on the hog at their local McDs.
  2. Brand battle: The McCafe concept, which is being rolled out nationwide, will do battle head-on with Starbucks in specially brewed coffee. This thought might take a while to accept, but judging from the locations where I have seen it introduced, it is a big success. It is driving a different kind of consumer to McDs – more upscale, a little higher income demographic. By all accounts I have heard from my coffee-drinking friends and family, the coffee is top notch and it is less expensive than at Starbucks. Could be a big win.
  3. Competitive atrophy: The other big burger companies have almost all moved their target audiences out of direct competition with McDonalds. Burger King is appealing now almost exclusively to men and Wendy’s appears to be aiming at attracting women. Both appear to have given up much of the kid’s market to McDs.

The Dividend Valuation Chart below shows that MCD is undervalued for the first time in three years. It is trading nearly 20% under its average MCD 12-18-08 3PE of the last 20 years. Click chart to enlarge.

Mike Hull, our consumer strategist, believes that MCD can post 6% higher earnings in 2009 over 2008, and that the dividend will grow close to 9%. That kind of relative performance will draw buyers to the stock, especially when the average stock will have lower earnings in the coming year.

Mike believes that MCD’s business model is putting increasing pressure on their competitors, which could add up to big market share gains in the year ahead for McDonalds.

As always, this blog is for information only. Do not make buy or sell decisions based on what has be written here. The authors and clients of the authors own the stock. Although we have no plans to sell the stock, we will not comment here when we do so.