No Love For McDonald's Despite The Fact They're Kicking Butt

mcdonald's big mac hamburger sandwhich burger

(Disclosure: the author owns shares of McDonald’s)

McDonald’s (MCD) shares are down about 2% today after same-store-sales came in below expectations. (up 2.2% vs. 3% expected).

We understand that the market was disappointed by the miss. But perhaps the concern is overdone.

McDonald’s continues to take market share in the current environment, benefiting from cost-conscious consumers.

At the same time, if the economy improves then markets are likely to continue rising and push the shares higher (due to earnings growth and valuation expansion) even if consumers shift away from some of its lower-cost offerings. Note McDonald’s also has higher-end offerings as well.

Stocks like McDonald’s are what make the market interesting right now. It is the kind of company that will likely survive even the sharpest of downturns, and can even take advantage of the situation while competitors struggle. Earnings have grown consistently since 2002, and despite a mild dip between 2000 and 2001, are set to reach an estimated $3.85 this year versus $1.39 10 years ago (as per Value Line). Looking 10 years forward, the McDonald’s franchise will likely be even larger given its strong market position and strong take-up in emerging markets.

Despite the improving long-term story, MCD’s has become cheap due to market pressure since the crisis. If you look at the average annual PE’s in the past, they bottom around 14x and have gone well above 20x (even 30x in 1999, on average). McDonald’s trades at just about 14.5x 2009 earnings right now.

*This is definitely not a recommendation to buy or sell, but rather an analysis of what looks like a defensive play.

**Again, the author owns shares of McDonald’s.

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