For years I made the mistake of believing that a company that was well-established like McDonald's couldn't offer the type of returns in the market that I was looking for. However, history has taught me that even large companies can find ways to continue growing, and maybe more importantly increasing their cash flow and dividend payments. Though some investors may believe that McDonald's is too large to provide an adequate return, I would suggest that they take a look at where the company can go rather than where it has been.
3 Competitors All Vying For The Same Customers Worldwide:
McDonald's is one of the few restaurant companies that truly competes on a worldwide basis. The other two companies that have the size and geographic diversity to compete on a level playing field with McDonald's are YUM Brands and Starbucks . All three of these companies have expanded beyond their original domestic operations and now have significant presences in most of the world. However, there is an incorrect perception that these companies have grown too large and that future growth will be disappointing. The problem with this assumption is, as it took decades for these companies to near saturation in their domestic markets, it will be many more decades before they reach saturation worldwide. In addition, each of these companies is constantly revamping their offerings to expand to an even wider base of customers. In fact, it's only a matter of time before these three concepts begin to overlap each other. This is already beginning, with McDonald's introducing its McCafe' lineup of beverages intended to compete directly with Starbucks. YUM Brands sees opportunity in breakfast sales, and is testing out new menu items designed to take sales away from McDonald's. That being said, McDonald's has been successful in expanding its menu to appeal to many tastes. In McDonald's most recent earnings report, the overall numbers might not look that impressive, but behind the headlines, you can see the opportunity available when the global economic picture stabilizes.
In the last three months, McDonalds' revenue was basically flat, but excluding foreign-exchange, revenue would have increased 4%. In similar fashion, diluted EPS was down 1%, but again adjusted for foreign-currency changes EPS would have increased 4%. In a telling sign that customers are eating at McDonald's more than before, global comparable sales were up 1.9%. While admittedly, competitors Starbucks and YUM Brands posted slightly better comparable store sales at about 6% each, there are other factors at play here as well. Since McDonald's operates in basically three geographic areas, let's take a look at how each division is doing individually.
Yeah, Thanks A Lot Europe:
Believe it or not, McDonald's largest market is not the United States. Based on revenue, the company's most important market is actually Europe. This explains why McDonald's had challenges in growing as fast as investors to come to expect. Everyone is familiar with the number of challenges facing Europe at the current time. You can see these challenges in the company's same-store sales results. Company owned same-store sales were down 3% and franchised stores saw a 6% decline. However, excluding foreign-currency, company-owned sales would have increased 7%, and franchise sales would have increased 4%. As proof that McDonald's believes in the future of this geography, the company increased its restaurant count by about 3% from the year ago period.
The Good Ol' U.S.A.:
There's no question that McDonald's is either at or close to saturation in the United States. The company runs over 14,000 restaurants, and new stores increased just 0.28%. Overall comparable sales increased 1.2%, but company-owned comparable sales were actually flat. To achieve overall same-store growth, the company had to rely on franchised comparable sales which increased 3%. While these results may not get investors excited, the United States is a cash cow for the company, and this allows McDonald's to profitably expand internationally.
The Rest Of The World Is The Big Opportunity:
In similar fashion to YUM Brands and Starbucks, McDonald's is expanding the fastest in the areas of the world with the greatest population and greatest potential for growth. The company's Asia-Pacific, Middle East, and African markets showed comparable sales up just 1.4%. However, new restaurant growth was over 6%, and at under 24% of total revenue, the company can expand quickly for a long time. Company-owned restaurants in this region saw sales increase 5%, and franchise stores saw an increase of 9%. Considering that the population of just India and China is a multiple of the United States, you can imagine the type of store growth available in the future. Simple math says if the United States can support over 14,000 McDonald's locations, that these other regions should be able to support a multiple of the United States store base.