Sometimes markets are spooked by numbers going wrong or stories going wrong, or esoteric factors that are sometimes quantifiable, sometimes not. Case in point: McDonald’s (NYSE: MCD), the fast food goliath, reported year-over-year sales for its U.S. restaurants flat for the first time in over four years back in December, so the stock was taken down quickly from the 60s into the low 50s. While traders did their short term thing, longer term investors were also concerned that McDonald’s couldn’t keep up the stellar earnings growth momentum it had fashioned so unfailingly. Was this the end of domestic growth, at least in the near term, for the fast food giant? Was this presaging or reflective of recessionary effects, something McDonald’s was often considered nearly immune to?
On Friday last, McDonald’s reported January same store sales at plus 1.9%, and with its overseas results thrown in, the total figure was a 5.7% increase. The European figures of over 8% and Asia’s nearly 8% gains fueled this growth. Investors, at least momentarily relieved that all near-term growth was not over, thought that perhaps McDonald’s could weather the current and possibly continuing downturn in consumer spending, bid the stock back up over 2% on the day, from an open of 54.90 to 55.64 a share.
The fast food restaurants, even more than medium or upscale dining, has traditionally been seen as relatively recession-proof, almost lumped in with supermarket food stocks as the menus of the McDonald’s and the like is often comparatively priced with buying and preparing similar foods at home. McDonald’s, and its competitors such as Wendy’s (NYSE: WEN) as well as others have traditionally featured low-priced dollar menus or items of regularly eaten foods. This strategy, along with others, has usually carried McDonald’s through recessions before. A legitimate question is the slowing of U.S. growth, however, long term. Is the U.S. market saturated with McDonald’s? While this is always a looming question for McDonald’s, it’s also a question, though less so perhaps, for its competitors.
McDonald’s has a market cap of $64B, with net income in 2006 of $3.5B on revenue of $21.6B. For its fourth quarter of 2007, it reported 73 cents per share, for the full year it reported $2.89 per share earnings, up from its $2.45 per share earnings in 2006. Analysts’ projections look for earnings of $3.17 a share in 2008 for the company, which is a modest 9.5% growth rate. The prior three years showed an average annual earnings growth rate of 16.9%. Historically, McDonald’s has been able to grow its earnings annually near the 15%, so defensive investors, value investors, and growth investors all look at the stock, while traders step in on any sharp prices moves.
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