by Jason Jenkins, Investment U Research
Tuesday, October 25, 2011
Once again we see a large multinational corporation exceed Wall Street’s expectations.
McDonald’s Corp. (NYSE: MCD) reported last week that its third-quarter net income rose by nine percent to $1.51 billion. This marked the ninth straight quarter of earnings gains. The fast food empire’s bottom line beat Wall Street estimates and was elevated by a 14-percent increase in revenue that offset some higher expenses the chain is facing, including a higher effective tax rate and rising labor costs in Europe and other markets.
Overall revenue rose to $7.17 billion, beating the $7.02 billion expected by analysts. Revenue at stores open at least 13 months rose five percent. This number is a telling statistic of a corporate entity’s well being because it excludes the impact of recently opened or closed locations.
Per-share earnings were $1.45, beating analysts’ expectations of $1.43.
Fast Food Giant Gets a Facelift
McDonald’s has been profitable during the recent global economic downturn in part because the chain has managed to reshape its image from a burger-and-fries joint into a cool place to eat with multiple healthy options. McDonald’s has introduced new menu items ranging from smoothies to specialized coffees to oatmeal.
Domestically, the company got a boost from the aforementioned premium McCafe beverages, a fairly new segment that has become a rock star in a market that Starbucks and Dunkin’ Brands dominated. Operating income in the U.S. market gained six percent this past quarter.
The menu isn’t the only thing going through renovation; the burger giant remodeled restaurants and converted more locations to 24-hour operations.
Chief Executive Jim Skinner stated: “The investments we are making to optimize our menu, modernize the restaurant experience and broaden McDonald’s accessibility with ongoing convenience and value platforms are driving profitable market share growth, a clear indication that our strategy is working.”
True Growth Comes From Emerging Markets
The other part of the success comes from directed efforts to expand its presence in emerging markets as the U.S. economy struggles. In China, McDonald’s increased its restaurant locations from about 1,200 to 1,400 over the past year. And even with its sovereign debt crisis, Europe now accounts for the biggest portion of McDonald’s revenue coming in a little over 40 percent.
McDonald’s revenue in the United States rose five percent. When you compare that to its rivals it seems very respectable, but pales in comparison to its own performance in other regions around the world. Revenue in Europe climbed 16 percent, and revenue in the Asia Pacific region, the Middle East and Africa climbed 20 percent.
Be Long on McDonald’s and its Foreign Franchises
The numbers look good for the momentum to last. What may be of slight concern is that McDonald’s raised prices on customers this year to deal with the higher costs for ingredients, like beef, and materials, like fuel. But as long as it doesn’t raise its prices too much, they won’t drive away their core budget-conscious customers.
And as McDonald’s goes, look for its foreign franchises to follow. Arcos Dorados (NYSE: ARCO) is the world’s largest McDonald’s franchisee, in terms of system-wide sales and number of restaurants. It’s the largest quick service restaurant chain in Latin America and the Caribbean, with restaurants in 20 countries and territories.
This Argentinean-based company just came public on April 2011 and pays a $0.06 quarterly dividend, good for a 1.1-percent dividend yield, and trading right near its IPO price. It had just over $3 billion in revenue in 2010 and a strong $250 million in cash position as of the end of 2Q with very little short-term debt. The company just had a big secondary offering last week of over 40 million shares at $22 per share, which was well received.
Good investing,
Jason Jenkins
Article by Investment U
