Last weeks are quite tough for McDonald’s shareholders. After a rally from around $100 to around $130 now shares are back at $115. What’s going on?

Lately there is much talk about fitness trackers which were added to happy meals but finally some skin irritations of people wearing bands happened and it was withdrew. Well it is definitely a negative news, but in my opinion it is non-material and financial impact should be limited. On the other hand there is a positive marketing news, that McDonald is probably the most popular restaurant in Olympic Village – well, again non material but positive for sentiment.

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Let’s have a look on last financial statement, maybe there will be some explanation of recent weakness.

Key highlights (italics), with my comment:

Second quarter highlights:

  • Global comparable sales increased 3.1%, reflecting positive comparable sales in all segments – good info
  • Due to the impact of refranchising, consolidated revenues decreased 4% (1% in constant currencies) – neutral/negative, company informed about big refranchising program, so when restaurants are temporarily closed it is not strange that there are some costs and there are no revenues
  • Consolidated operating income was relatively flat (increased 3% in constant currencies), which included approximately $230 million of previously announced strategic charges, consisting primarily of non-cash impairment charges related to the Company’s ongoing refranchising and G&A initiatives, as well as the decision to relocate the Company’s headquarters – stable business, with lower revenues flat operating income with one-off charges seems to be good
  • Diluted earnings per share of $1.25, decreased 1% (increased 1% in constant currencies), which included strategic charges totaling $0.20 per share. Excluding the impact of these strategic charges and prior year restructuring charges of$0.04 per share, diluted earnings per share increased 13% in constant currencies – very good result in my opinion
  • Returned $4.1 billion to shareholders through share repurchases and dividends. This brings the cumulative return to shareholders to $24.4 billion against our targeted return of about $30 billion for the three-year period ending 2016 ­­– very good result comparing to market cap of around $98b

Well, expectations must have been too high. In my opinion presented results are good. We should note that net income margin of around 17% is rather high, which shows high quality of business management.

Although share price dropped a little bit in my opinion valuation is still high. With EV/EBITDA around 13 and P/E around 21 I see no reason to buy shares now. On the other hand dividend yield of 3.2% + buyback (high, $5-6b this year, but rather not persistent in long term) seems appealing. Historically dividend yield was up to 4% – this is definitely a strong buy level. Also the question is what management will do after program of returning $30b to shareholders will be finished.

 

Summing up, McDonald is a great business, but current valuation is for me still too high. I do not change my investable level from $100 and I am patiently waiting for a good opportunity to buy shares.

 

Disclaimer – MCD no position