Recently I saw a movie The Founder, which inspired me to look again at McDonald. As we can read on Wikipedia about movie: This drama tells the true story of how Ray Kroc, a salesman from Illinois, met Mac and Dick McDonald, who were running a burger operation in 1950s Southern California. Kroc was impressed by the brothers’ speedy system of making the food and saw franchise potential. He maneuvered himself into a position to be able to pull the company from the brothers and create a billion-dollar empire. I definitely recommend a movie, but let’s come back to financial analysis of Golden Arches.
In my last note I wrote: 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. As in many cases I was quite reluctant to pay high multiple and now multiple is even higher.
Now company is traded:
EV/EBITDA = 13.3
P/E = 20.3
Dividend yield = 3.8% (!) + buyback 8% annually for the last 2 years (not sustainable in the long term, there was a $30 billion return to shareholders program)
Well, multiples are high, but this tremendous return of cash to shareholders is definitely supportive for share price. Let’s look on business developments:
Full year highlights:
- Global comparable sales increased 3.8%, including positive comparable sales across all segments
- Consolidated revenues decreased 3% (flat in constant currencies), due to the impact of refranchising
- Consolidated operating income increased 8% (11% in constant currencies)
- Diluted earnings per share of $5.44 increased 13% (16% in constant currencies)
- Returned $2.2 billion to shareholders through share repurchases and dividends in the fourth quarter and $14.2 billion for the full year, marking the successful achievement of the Company’s targeted return of $30 billion for the three-year period ending 2016. In addition, the Company announced a 6% increase in its dividend beginning in the fourth quarter.
Business is doing well, though keep in mind that most of EPS growth is due to buybacks. But it is real EPS growth, I mean it is cash EPS, non-one-off etc. But when buybacks decrease then dynamics on EPS should be lower as well. Keep it in mind.
It is quite disturbing, because when things go wrong as in Target then people are not saying that EPS is growing, but that LFL dynamics are weak. Here as situation is doing well, then it is enough to look at EPS, but if we look on net income we can see flat result!
The key question for me is what management will do after the program of returning $30b. Should we expect more investments in restaurants?
Summing up, I have no reason to change my last opinion. 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. OK, maybe I will raise my investable level by 5%-10%, as times flies and business is growing.
Disclaimer – MCD no position