From Today's Fool: (for personal use only)
An Investment Opinion by Dale Wettlaufer
FOOL PLATE SPECIAL: McDonald's Pleases Franchisees
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Quick-serve restaurant king McDonald's (NYSE: MCD) served up some fun
for its shareholders this morning, climbing $2 1/4 to $63 3/8 after the
company said that it's "on track to meet our stated objective of
increasing earnings per share 10 to 15 percent in each of the next five
years, excluding the effect of foreign currency translation." Assuming
neutral currency effects in the coming year, that means the mean analyst
estimate of $2.51 per share for 1998 looks highly probable of being hit
and 1999's mean estimate of $2.83 per share also looks to be within a
reasonable range.
Given that incremental information is what gets priced by the market on
a daily basis, a penny per share here and a penny there not only changes
the amount of cash flows the market attempts to discount, but it may
also change assumptions on the time period over which the company can
generate returns on invested capital above its cost of capital. The
longer a company can do that and sustain what is called a "competitive
advantage period," the more the company is intrinsically worth.
There are a couple of things brewing under the surface at McDonald's
that should change the company's financial performance for the better.
Investors should know first off that McDonald's is a large owner of real
estate, having acquired that real estate in the go-go growth years of
franchise founder Ray Kroc in the 1960s and '70s. The company now plans
to focus more on getting its franchisees into the position of owning the
land on which their units sit, which unlocks parent corporation assets
that were fixed. One reason why the company's return on equity and
margins are so high is because a big chunk of its real estate is
reflected at decades-old cost on the balance sheet, reflecting
historical cost and not the current value of that equity. Unlocking
those assets will in turn feed the company's goal of nearly doubling its
international restaurants within the next five years.
The outlook for McDonald's is much better these days after suffering for
a number of years. With the highly profitable McFlurry generating
excellent marginal returns and the new MBX meeting the challenge posed
by the reinvigorated Burger King, McDonald's menu is once again
attractive and uncomplicated. Add to this the company's move to
allocating 50% of media spending in local markets, up from 25% last
year, and the company is doing what it takes to keep its local
franchisees happy. In the end, that's something that Ray Kroc
understood. From the locally born innovations of the Big Mac and the
whole concept of breakfast at McDonald's, the company's franchisees have
always been a source of strength. Traditionally, franchisees have always
had a say in how media spending is done, but the increase in the split
between national and local advertising is a reaffirmation of the
company's dedication to its local operator. One would be hard-pressed
not to connect this renewed dedication with McDonald's financial
performance and the performance of its stock of late. |
