McDonald's: A Perfect Hybrid Between Growth and Value?
Evaluating the strength of the fast food giant.
McDonald's (NYSE:MCD) might not meet the strict definition of a value stock in the tradition of Ben Graham, but as an investment, McDonald's possesses many of the qualities that Graham's famous adherent Warren Buffett looks for in companies.
While the stock may be a little too expensive and high-quality for Graham, who focused on ultra-cheap, "cigar butt" companies, McDonald's is a name that today's value investors should not overlook.
This is particularly true of investors who follow Buffett's axiom that it is better to buy a great business at a fair price than a bad business at a rock bottom price. First, McDonald's has a simple and straightforward business model that is easy to understand. Buffett has always stressed the importance of investing in businesses that he can understand and have an idea of what they will look like in the future.
McDonald's meets this criteria and the company's revenues and earnings have been trending up in a predictable manner over time. Another paradigm of Buffett's investment philosophy is to allocate capital to companies that have a wide moat or competitive advantage. Oftentimes, this is found in a superior brand name. Buffett's investments in Anheuser-Busch (NYSE:BUD) and Coca-Cola (NYSE:KO) are good examples of this investment tenet.
McDonald's is one of the strongest, most recognized brands in the world. Its brand positioning relative to competitors should allow the company to remain the top quick-service restaurant player in the industry for a long time. Right now, the company is head and shoulders above its competition and there is little indication that this will change anytime soon.
On the financial side, not only does McDonald's throw off a respectable amount of cash every quarter because of its steadily maturing business and competitive advantage, but it also has room for strong international growth. Make no mistake, one trend that will continue to come to the forefront over the next couple of decades will be the rapid development of emerging and frontier markets. McDonald's will be there.
The company also has a very strong management team that has a history of creating shareholder value. Over the last 10 years, the stock is up around 414% compared to a gain of 78% for the S&P 500. McDonald's is not only a premium company with a tremendous brand and history of creating shareholder value, but also has significant defensive properties.
The stock was one of the best performers during the financial crisis as investors hid out in the name speculating that McDonald's would benefit from the recession because of its low cost food. Not only can the company grow its top-line in good times, but it has a tendency to do well in bad times as well. This is an incredibly attractive property in any investment.
At current levels, McDonald's trades at a trailing P/E of 17.37, a forward P/E of 15.51, and a PEG ratio of 1.86. This is not exactly cheap, but may be a fair price for such a high-quality investment. The stock is offering a dividend yield of 3.30% at current levels that, along with the company's history of increasing payouts, should support the stock price.
Year-to-date, McDonald's has been underperforming the market and is down around 8%. This small dip may prove to be another good buying opportunity in the shares, as every other pullback in the name has proven to be over the years. Investors who value quality, value and defensive properties, growth potential, and a franchise that has a history of creating shareholder value, should take a look at McDonald's.
Editor's Note: This content was originally published on Benzinga.com by Scott Rubin.
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