Introduction - McDonald´s Corporation
McDonalds is the largest fast-food restaurant in the world serving more than 68 million customers daily in 119 countries over 35 000 restaurants. McDonalds restaurants are operated in three different ways, either as an franchisee, affiliate or by the corporation itself.
The core products in McDonalds portfolio are hamburgers, chicken, fries, soft drinks, milkshakes, breakfast and desserts. In the last year they have also added some new products to expand its menu to changing consumer tastes, which includes, salads, fish, wraps, smoothies, fruit and seasoned fries.
One of the best things with McDonalds product portfolio are that you know what you get, no matter where in the world you are.
Customers, industry and route-to-market
McDonalds operations are divided geographically between four different divisions, Europe, US, APMEA and other countries and corporate. Europe is their biggest market with 39% of the revenue, US are the second one which contributes with 31% to the revenue and APMEA stands for 23% of the revenue and other countries and corporate stands for 5% (numbers from 2013).
Industry
Accordingly to re-search from IBISworld has the global fast food market been growing in the last five years, which is impressive when thinking about the fact that people are moving away from unhealthy fast food and the financial crisis. At 2013 the fast food industry had a global market size on 477.1 billion USD and is expected to have a size of 618 billion USD by 2019, an impressive growth on 29.5% from todays numbers.
There have been some challenges for the fast food industry in the last years, which has been pressuring profit margins. The total market as a whole has proven that its possible to withstand these challenges, though some players have done better than others. The biggest challenge has been and are the more and more focus on high quality food. In general the fast food today is pre-made and then heated when served to the customer, also much of the food is high in fat and has been shown to increase BMI and therefore cause weight gain. The response from this from the industry has been to adding quality and healthy options to the menu, and have had some measure of success, but still the bad reputation hangs over the fast food restaurants.
How are the prices on the ingredients for the fast food industry? The most important commodities for the fast food industry are, corn, wheat, potatoes and beef. The table below explains the 5 year increase or decrease in prices.
As could be seen in the table has the most ingredients has becoming more expensive in the last 5 years, and within an industry that competition is high, we could expect low profit margins, often south of 10%.
McDonalds profit margin for the last quarter was 15.29% with an average on the last 5 years of 19.76%. To show you some benchmarks numbers Starbucks has a profit margin on 14.06%, Dunkins Brands Group 28.39% and Chipotle 12.06%. The most important number for me here is the difference between the profit margin McDonalds has today and what the average has been over the last 5 years. Why? Because I expect McDonalds to get back to their normal profit margin in a certain future.
Industry recession proof?
There have been some challenges for the fast food industry in the last years, which has been pressuring profit margins. The total market as a whole has proven that its possible to withstand these challenges, though some players have done better than others. The biggest challenge has been and are the more and more focus on high quality food. In general the fast food today is pre-made and then heated when served to the customer, also much of the food is high in fat and has been shown to increase BMI and therefore cause weight gain. The response from this from the industry has been to adding quality and healthy options to the menu, and have had some measure of success, but still the bad reputation hangs over the fast food restaurants.
How are the prices on the ingredients for the fast food industry? The most important commodities for the fast food industry are, corn, wheat, potatoes and beef. The table below explains the 5 year increase or decrease in prices.
As could be seen in the table has the most ingredients has becoming more expensive in the last 5 years, and within an industry that competition is high, we could expect low profit margins, often south of 10%.
McDonalds profit margin for the last quarter was 15.29% with an average on the last 5 years of 19.76%. To show you some benchmarks numbers Starbucks has a profit margin on 14.06%, Dunkins Brands Group 28.39% and Chipotle 12.06%. The most important number for me here is the difference between the profit margin McDonalds has today and what the average has been over the last 5 years. Why? Because I expect McDonalds to get back to their normal profit margin in a certain future.
Industry recession proof?
In the past the fast food industry has in general been recession proof, and indeed the industry did not suffer nearly as much as other consumer sectors in the 2009 financial crisis. In fact, McDonalds had an increase in visitors to there restaurants as people during the recession tends to choose cheaper food options over traditional restaurants. On the other hand the recession hurt spending, and consumers overall purchased less per visit.
Valuation
Mcdonalds are at the moment trading at a price of 96.31 USD and to 18.95 times 2014 expected earnings, S&P 500 are right now trading at a P/E of 20.21. That McDonalds are trading at a discount compared to the P/E of S&P 500 which seems attractive to me. From my point of view McDonalds should at least be trading in line with the S&P 500 due to their friendly shareholder management, recession proof, history of strong growth and one of the best brands in the world. I think the company seems to be under valued and should be trading around 115 USD per share at least, Why McDonalds should be traded at a higher price?
Heres why:
-Shareholders will see double digit growth, both from organic and innovation/expansion.
-Re-purchases of shares will do great for the share price.
-Friendly dividend policy.
-Upward revision of McDonalds P/E metric.
Heres why:
-Shareholders will see double digit growth, both from organic and innovation/expansion.
-Re-purchases of shares will do great for the share price.
-Friendly dividend policy.
-Upward revision of McDonalds P/E metric.
Conclusion
McDonalds is a wonderful company that are under high pressure at the moment from a lot of external factors, but after the last sales numbers I still sold my shares. I sold my shares due to the fact I dont know really when this ship will be turned around, McDonalds has been dead money for around 10 years now and I dont know if it will take another 10 years until we will see things start to happen with the share price. If the share price goes down to under 85 USD I will get back my position in McDonalds, but at the price its traded at now (94 USD), I see more potential in other industries/ companies.
To end this, McDonalds will be on my watch list and I am confident that if you are buying now it will still be a good investment in 7 years a head, but as soon as I dont see organic growth, a more modern menu or Mc Cafe start pay off I will place my money in other sectors.
Merry Christmas and Best wishes with your investments for 2015!
Sincerely,
Eighth Wonder Investing
Inga kommentarer:
Skicka en kommentar