CNBC Stock Blog

After Apple, This Stock Ought to Be Owned by Everyone

Frank Byrt

Which company was founded by an entrepreneur who was ahead of his time and changed the world, keeps innovating to stay ahead of its rivals and charges more than competitors for basically the same products?

No, it's not Apple , whose late co-founder, Steve Jobs, ignited a revolution in must-have digital gadgets such as the iPod and iPhone. It's McDonald's, which started out as a small hamburger chain and, through franchising and the addition of everything from salads to coffee, has become the world's biggest restaurant company whose profits dwarf the likes of Burger King.

McDonald's Meal

Unlike Apple, McDonald's isn't a top 10 holding of nearly every mutual fund in the U.S. And few individual investors and financial Web sites fawn over Quarter Pounders and McRibs the way they do over consumer electronics. But McDonald's, which reports quarterly earnings Friday, should be a cornerstone investment in any portfolio as it has proven its resiliency in all economic conditions and has an all-weather share performance.

A $10,000 investment in the Oak Brook, Ill.-based firm five years ago would be worth $25,243 today, given its shares' 19 percent annualized return. In contrast, the S&P 500 has declined an average of 0.4 percent each year during that time. In fact, McDonald's ranks 34th on the benchmark index during that time, beating out high-fliers such as gold and copper producer Freeport-McMoRan, agricultural company Monsanto and chief rival Yum Brands. (Apple is No. 5 on the list, having risen five-fold.)

McDonald's long-term record looks just as good. Over 15 years, its stock has an average annual return of 10.4 percent, nudging out the S&P 500's biggest member, oil company ExxonMobil , and doubling the S&P 500's increase.

JPMorgan analysts said in a Sept. 28 research note that "we continue to recommend McDonald's as a core holding," a view the biggest U.S. bank has held since 2003.

McDonald's also gets the imprimatur of institutional investors, as they own 68 percent of its shares. Fidelity Investments, Vanguard and State Street each own just over 4 percent of McDonald's outstanding shares.

And it's one of those few companies that look out for its investors. From 2008 to 2010, the company returned $16.2 billion to shareholders through buybacks and dividends. The company raised its dividend in September, resulting in a $2.80 per share payout this year and a projected yield of 3.16 percent.

Despite the economic malaise, the world's appetite for fast food remains insatiable. McDonald's sales are projected to rise 12 percent this year, following 5.8 percent growth in 2010, when they were $76.7 billion.

There are about 33,000 McDonald's restaurants in 118 countries. Only 6,300 are company-owned, but the headquarters back in Illinois owns many of its franchisees' buildings and real estate, providing a steady cash flow above that coming from its food business.

The basis of McDonald's success is its time-tested menu and strict management strategy that mandates system-wide uniformity, including excellent customer service and food quality. The result is a relatively unblemished brand name, known the world over.

McDonald's adaptability can be seen in a readiness to change its menu to meet differing customer tastes, while maintaining its Big Mac-fries-and-a-Coke customer.

It has introduced healthier fare, such as salads, oatmeal, apple dippers and fruit smoothies as well as premium products including the Angus Third Pounder and McCafe specialty coffee, and that's while offering a $1 value menu to capture the low-end diner. In Asia, its menu includes a shrimp burger and a sandwich made up of spicy chicken on a fried-rice patty glazed with soy sauce.

Part of the beauty of McDonald's business is that if a new menu item is a disappointment, such as the McPizza, it doesn't result in a big hit to earnings, unlike, say, a product miss at a technology firm. For example, Apple's Newton, a personal digital assistant introduced in 1993, was an immediate disaster, but it took the firm about five years to admit defeat and pull the plug, resulting in a significant write-off.

Although it's facing rising food and commodities costs, McDonald's has the pricing power to maintain its operating margins, which were 31 percent in 2010, without losing customers.

In the U.S., McDonald's leads the $160 billion quick-service restaurant industry with its $31 billion in sales last year, but the competition is tough, led by Yum Brands' Kentucky Fried Chicken, Pizza Hut and Taco Bell chains, Wendy's and its Wendy's Old-Fashioned Hamburgers and Arby's Roast Beef, Burger King and relative newcomer Chipotle Mexican Grill, a McDonald's spinoff.

The company's U.S. same-store sales results were up 5 percent in 2010, and it should maintain that this year, but McDonald's greatest long-term growth is expected to come from its foreign markets. European sales are seen growing by 6 percent this year, but the combined Africa and Asia market is estimated to expand by 10 percent, led by China, which can be viewed as McDonald's last unconquered market.

It barely has a foothold in China, the world's second-largest economy, with about 1,400 restaurants. Restaurants in that country are expected to provide an estimated 3 percent of McDonald's 2011 operating income.

In contrast, Yum! Brands' KFC is way ahead with 3,400 restaurants, which will provide 43 percent of Yum's estimated 2011 operating income, according to JPMorgan.

That indicates McDonald's has tremendous growth potential. "China is our fastest-growing (market) from the income standpoint and from the revenue standpoint," a McDonald's Asia region executive said in an interview last year.

That's why McDonald's has the ambitious goal of at least 2,000 locations in China by 2013.

McDonald's is expected to report earnings Oct. 21. Analysts' consensus outlook is for $1.43 per share, up 10.8 percent over last year on revenue of $7.01 billion, up 11 percent.


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