McDonald’s: Checking In

by The Compound Investor

The last time McDonald’s (MCD) featured on the site was back in January. The Chicago-based fast food giant traded for just over $216 per share back then. If you just took a look at the stock price, you’d be forgiven for thinking not much had happened here. Granted, you would have had to have been living in a cave these past eight months or so, but it is amazing that the shares have basically round-tripped back to their January price. The stock closed last week at the $218 mark.

I had worried that this year would be a total disaster for the firm. I mean, literally all of its 1,300 stores in my part of world were closed for weeks. That presumably meant zero revenue for its franchisees, with equally dire implications for the head company. To see huge lines of desperate customers upon its re-opening was a sight for sore eyes. The overall damage was actually not as bad as I thought, although that may sound strange given the collapse in systemwide sales. The company saw the total amount spent in its 39,000 restaurants drop by 23% in the second quarter compared to the same point last year. That figure falls to 13% across the first half of the year as a whole.

On the plus side, that didn’t stop it from turning a profit. McDonald’s posted just under $485m in net income for 2Q20, equivalent to around 65¢ per share. That was some way below the $1.5B it made last year (circa $1.97 per share), though not so bad all things considered. Profit for the first half of FY20 consequently came in at just under $1.6B ($2.12 per share), almost enough to cover its dividend spend.

Outlook

I regret not buying more at the March low. We can probably ignore this year; it’s not representative of much, though analysts still expect the firm to earn around $4.35B. I make that equivalent to around $5.80 per share based on 745m shares outstanding. Or put another way, one could have purchased the stock for 23.5x current year earnings at its lowest point. I’d say that was not a bad deal at all given how severely depressed this year’s profit figure is. Just as a reminder, McDonald’s posted a net profit of $7.90 per share last year.

Things look even more obvious further down the line. Analysts expect the company to fully recover beyond pre-pandemic levels as early as next year. Profit estimates of circa $8.15 per share imply low single-digit growth compared to FY19. The company pays out around $5 per in annualized cash dividends, so we are looking at around $2.25B of retained profit next year. That will come in handy given debt has swelled to $35B, not that it has much of an issue there. Anyway, that FY21 profit number worked out to 17x forward earnings based on the the March nadir; not a bad deal in a world in which the 10-year Treasury yield is well below 1%.

The last sentence pretty much sums up why the stock can continue to do well. Five years ago, it traded at around about the $97.50 per share mark. McDonald’s pumped out cumulative dividend cash worth around $16.50 per share in its following four full fiscal years. Cumulative retained profit clocked in at a further $11.85 per share on top of that. All of this from what is essentially a property business. It collects rents – albeit tied to sales of hamburgers, fries and milkshakes. There is a huge demand for that kind of durable and high quality income, and that can keep the shares from falling too much in my view.

Note

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