Why McDonald’s Is Brilliant
Monday, February 27th, 2012
By Sasha Cekerevac, BA for Profit Confidential
Every year it seems we get some new investment strategy that assures us it is the “secret” to getting rich. Over a decade ago, it was the Internet and dot-com hype. Recently, it’s social media, with Facebook and LinkedIn Corporation (NYSE/LNKD). For a long-term investment, the key is what management can do to constantly innovate and grow.
Many people wouldn’t associate blue-chips with being highly innovative, but they’d be wrong. They might say that high-tech blue-chips like Apple Inc. (NASDAQ/AAPL) can create new products with technology, driving their corporate earnings. I’m here to say that old-fashioned blue-chips like McDonald’s Corporation (NYSE/MCD) can also have an innovative investment strategy.
In 2003, McDonald’s stock was trading near $13.00; today, it’s approximately at $100.00 with a dividend yield of 2.78%. The investment strategy of McDonald’s has been highly successful in driving corporate earnings year after year, a true definition of what blue-chips should be doing.
How are they innovative? A recent example is word from the company that, in France, McDonald’s is coming out with a baguette-based burger, called the “McBaguette.” And so McDonald’s continues its investment strategy of trying new, innovative ideas by slightly tweaking its model to the local market. It’s certainly not easy, but slight changes to a solid formula are what drive corporate earnings. In 14 European countries alone, McDonald’s has 20 different menus that have been tweaked slightly to better fit in with the local market.
This investment strategy not only adds a local flavor, but it also drives corporate earnings and margins, since these products are being charged at a slight premium to McDonald’s regular menu. Blue-chips that, over a long period of time, have a consistent investment strategy of reinventing themselves are the types of companies I want to invest in for the long term.
The valuation of blue-chips and rising stars is a difficult task for any analyst. Different levels of corporate earnings, varied plans regarding investment strategy, and growth rates all make it tough to compare companies. An interesting comparison is the high-flyer Facebook against McDonald’s. Both are being valued around the same level, with a market capitalization of approximately $100 billion each. McDonald’s is generating almost $10.0 billion in net income compared to Facebook’s roughly estimated $1.0 billion. Yes, Facebook is growing very fast, but a growth rate for McDonald’s of approximately 10% and a dividend yield just under three percent is very solid.
While no one can predict the future, I would be willing to bet that McDonald’s will be around for a much longer period of time than Facebook. Investing in blue-chips is all about longevity, which can only come from innovative ways to grow corporate earnings. A solid, long-term investment strategy needs to be in place for share prices to continue to go up. Look for innovative ideas from management when investing in blue-chips.