McDonald's Corporation (MCD) released Q3 and YTD results on October 22, 2019.
At the time of my August 3rd article my analysis suggested that MCD shares were somewhat expensive. I indicated that I would be open to acquiring additional shares if the valuation were to retrace to a more acceptable level.
MCD's valuation has recently improved and I have just added to my MCD position.
In my August 3rd McDonald’s Corporation (MCD) article I touched upon MCD’s FY2019 Outlook, Debt, Credit Ratings, Dividend, Dividend Yield, and Dividend Payout Ratio, Share Repurchases, and Valuation. Based on my analysis I indicated I would be interested in acquiring additional shares at ~$200; shares were trading at $214.48 at the time that article was written.
On October 22nd MCD released Q3 and YTD 2019 results and I acquired additional shares in one of the accounts which currently holds MCD shares and for which I do not disclose details.
While MCD missed quarterly earnings estimates for the first time in 2 years, the US segment was softer than anticipated, it continues to be profitable and generates strong Free Cash Flow. This provides management with the flexibility to reward shareholders through reinvest in the business, the repurchase of shares, and dividend increases.
On the Q3 earnings call, MCD’s CFO and EVP indicated that in September, the board of directors approved an 8% dividend increase to the equivalent of $5 annually; this marked the 43rd consecutive year in which the dividend was increased. He also indicated that in Q3, MCD repurchased additional shares bringing the cumulative value of shares repurchased to $22.5B against the company’s 3-year cash return to shareholders target of ~$25B which will be completed by the end of this fiscal year (December 31st).
With shares having recently pulled back to the ~$200 level, the forward dividend yield is now ~2.5%.This level is an improvement from the 2017 and 2018 levels of ~2.23% and 2.36% but still falls short of the levels evidenced in 2009 – 2016: 3.28%, 2.94%, 2.52%, 3.25%, 3.22%, 3.50%, 2.91%, and 2.97%.
Investors focused on dividend yield may view MCD’s current dividend yield as being a reason not to acquire shares. I view dividend income as only one component investors should consider when investing in a company, and therefore, a low dividend yield will not discourage me from investing in a company. My objective is to invest in profitable companies which:
- generate strong Free Cash Flow;
- possess competitive advantages;
- have strong management;
- have attractive growth prospects;
- repurchase shares;
I think MCD is somewhat recession proof and is strategically positioned if a global slowdown does materialize as its lower priced item menus will be attractive to consumers (even if the food quality is suspect).
Although competition has intensified in the fast-food space with competitors such as Burger King, Wendy’s, and Popeye’s modifying their menus to appeal to changes in consumer tastes and behavior I am of the opinion MCD will be able to adapt.
In addition to adapting the menu to appeal to meet the changes in consumer tastes and behavior, MCD has embraced technology to provide simpler, smoother, and more personal customer engagement over its digital channels. In fact, MCD created McD Tech Labs. This was fueled by its recent acquisition of Apprente.
On the Q3 conference call with analysts, management indicated:
‘Our new team based in Silicon Valley brings first-mover advantage in a must-win area for our system, voice technology. Apprente talent and technology comes with the promise of more efficient and accurate ordering at the drive-thru and a better experience for our customers. At the same time, we expect the technology to reduce complexity for our crew. Whether we look across the tech or consumer world, we see voice technology playing an increasing role in all our lives. At McDonald's, this is particularly significant because the importance of drive-thrus to our portfolio.’
As at the end of Q3, MCD has generated $5.80 in YTD diluted EPS (full year earnings in FY2017 and FY2018 amounted to $6.37 and $7.54).
MCD generated the following quarterly diluted EPS in Q2 2018 – Q3 2019: $1.90, $2.10, $1.82, $1.72, $1.97, and $2.11.
If MCD were to experience a Q4 which was similar to Q3 and were to generate $2.10 in diluted EPS, then full year diluted EPS would be $7.90. With shares trading at ~$200 we arrive at a ~25.32 forward PE. Compare this level to the ~26ish - ~27ish levels evidenced earlier this year and we see that MCD’s valuation has improved slightly…still a bit expensive but not totally unrealistic for a company with attractive long-term growth prospects.
Turning to adjusted EPS, MCD generated $2.11 in Q3 and $5.87 YTD. Consensus guidance from one of my sources reflects guidance from 27 brokerage firms and calls for FY2019 adjusted EPS of $7.88 (mean); guidance ranges from $7.79 - $8.10. Using the mean estimate and the current ~$200 share price, MCD’s forward adjusted PE is ~25.38.
I am of the opinion MCD will continue to reward shareholders over the long-term and that it will benefit if we do get a slowdown in the global economy.
I have visited multiple MCD’s restaurants this past year (never for food…just coffee) and regardless of the location and time of day there is always a steady flow of customers.
I concluded my August 3rd article stating that:
‘I fully intend to add to my MCD position but given current market conditions I am hoping that MCD’s share price will get caught in a downdraft. While MCD’s share price has ticked up slightly subsequent to the Fed’s announcement of a rate cut, I am cautiously optimistic MCD’s share price will pull back in the short-term if the US/China trade war escalates.’
With MCD’s share price having pulled back ~10% from the 52 week high set in August I have added to my position and would be open to acquiring additional shares should the share price decline further.
I wish you much success on your journey to financial freedom.
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Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long MCD.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.