Monday, December 10, 2012

McDonald's Sales Surprise to the Upside

A month ago McDonald's reported disappointing sales results for October. The stock dropped as a result, and people started talking about how weak consumer spending would be.

This morning November sales were reported and they clearly exceeded expectations, so now everybody's smiling. What a difference a month makes. Or does it?

To me the two reports merely point out the volatility associated with too much real time information, and especially if we act on it prematurely or precipitously by buying or selling stocks. In the end, it's the long term trend that matters, and McDonald's is a nicely positioned global value retailer. It has solid management and a large market share as well.  Importantly, it has a strong balance sheet and pays a dividend that currently yields 3.45%.

As a company it's performed well over the years, and there's every reason to believe that it will continue to do so. And besides, McDonald's business is easy to understand. We can even test its products!

So all that leads me to ask, what's not to like for the long term investor? And my answer is there's nothing not to like. Nothing at all.

McDonald's Sales Top Forecasts has the story on November's sales:

"McDonald's Corp.'s global same-store sales rose a bigger-than-expected 2.4% in November as the world's largest fast-food chain was able to reverse the decline it reported for October.

Analysts were expecting a 0.17% rise in global sales at restaurants that have been open at least 13 months, according to Consensus Metrix.

"We are strengthening our focus on the global priorities that are most impactful to our customers—optimizing our menu, modernizing the customer experience and broadening accessibility to our brand to move our business forward amid today's broad-based economic and competitive challenges," Chief Executive Don Thompson said.

McDonald's has largely been able to boost guest traffic and sales faster than most of its competitors with its expanding global operations and increasingly diverse menu, such as higher-margin products like blended-ice drinks. But last month the burger giant reported a drop in monthly sales, its first decline in nine years, surprising investors who were expecting weakness in Europe and Asia but were caught off guard by the decline in U.S. same-store sales.

McDonald's blamed the decline on a weak economy and heightened competition from rivals offering coupons. It has since been promoting dollar-priced items more and announced that it would replace the president of its U.S. business on Dec. 1, but no new menu items have been introduced.

McDonald's said November systemwide sales rose 3.2%, or 4.8% in constant currency.

Same-store sales in the U.S. rose 2.5%, compared with the analysts' estimate of a 0.59% decline. The company said results benefited from its breakfast offerings along with balance across everyday value offerings, premium menu options including the limited-time Cheddar Bacon Onion sandwiches, and the beverage lineup.

In Europe, same-store sales increased 1.4%—topping analysts' forecast for a 0.1% rise. McDonalds's noted that positive results in the U.K., Russia and other markets were partly offset by performance in Germany.

The Asia/Pacific, Middle East and Africa region posted a 0.6% increase, topping the analysts' projection for a 0.93% drop. The figure reflects positive results in Australia and other markets that were largely offset by ongoing weakness in Japan."

Summing Up

McDonald's U.S. November sales results bode well for overall U.S. retail sales in coming months. If gas prices come down as well, that will make their outlook even better.

While the company's share price isn't in the bargain low P/E priced category at a multiple of 16 times earnings (share price divided by earnings per share), McDonald's is a blue chip company with a nice dividend that can be expected to grow over time.

At least that's my take.

Thanks. Bob.

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