Technically, you could say that MCD's is ready to break-out to an all-time high, or is putting in an 8-year double-top (a technical term meaning that a long-term topping formation is being put in place) for the king of Big Mac's, but if we had to fall into one bucker or the other, we'd say that MCD's still has some room to run.
Since its previous peak at $49.56 in December, 1999, MCD's fell all the way to $12 per share in mid-March, 2003, and then finding a bottom with the rest of the stock market at that point, MCD's has climbed steadily higher to its current price of $48 and change, however the stock price appreciation isn't all market related.
MCD's grew earnings between 4% and 12% in the last half of the 1990's which paled in comparison to the technology sector's 40% growth year-in-and-year-out at that point in time, so if I had to guess, I'd say that most of the MCD's stock price performance was attributable to its "large-cap growth" moniker of that period since operationally MCD's didn't do all that well. (We owned the stock at one point between 1997 - 1999 until we heard that MCD's had a "Bun Committee" of 12 people which was responsible for all facets of hamburger bun operations, and right away GM and IBM came to mind in terms of corporate sloth. The stock was sold the next day.)
Now the fact that we avoided the name in the 1990's and the early 2000's and then started buying MCD's right around March, April, 2003 had to be one of our better decisions as a firm to date, but what got us interested in MCD's was the fact that in early 2003, with the stock trading near $15, the stock was approaching the real estate liquidation value, and thus represented a low risk entry point.
However, the key to the MCD's story since eraly 2003 has been cash flow: pure, unadulterated, unmitigated cash and free-cash-flow generation along with improved operations.
In the last 4 years, MCD's annual dividend has increased from $0.40 to $0.55 to $0.67 to 2006's $1 per share and the 4q trailing cash flow from operations has increased from $3 to $5 bl in the last three years. The dividend yield has remained fairly constant at between 1% - 2% since 2003, as the stock price appreciation has kept pace with the dividend growth.
Free-cash-flow, or the FCF "yield" ( 4q trailing free-cash-flow as a percentage of 4q trailing revenues) has ranged from between 6% - 10% in the last 16 quarters or 4 years, much of which has been returned to shareholders in the form of stock repurchases and the aforementioned higher dividends.
ROIC or return-on-invested capital has increased from a low of 7% in mid 2003, to the current ROIC of 14%.
So what does the future hold ? With 30,000 stores currently a lot of MCD's store expansion is behind it, but this also is one of the reasons MCD's is generating so much cash flow: it is now a mature grower, and a cash cow of sorts, but through the "designated licensee" (DL) program, MCD's is trying to reconfigure ownership and the balance of franchisee's to company owned stores, and thus continues to unlock more value, and generate more excess cash.
More importantly, MCD's is improving operations: per our internal spreadsheet, the March '07 comp of 9.7% was the best systemwide sales comp for MCD's since December of 2004, and Europe's March '07 comp of 11.2% was one of the best ever for that region. (In MCD's 2006 annual report, on page 25, management states that a 1% increase in European comp's "would increase annual net income per share by about $0.02 (two cents).)
Bottom line: MCD's stock options are subsiding, thus the share repurchase program will be more accretive to shareholders, the turnaround in operations is a huge positive, and the very strong cash-flow and free-cash-flow generation will keep a floor under the stock. Since 2003, MCD's has grown earnings per share, 35%, 6%, and 20% respectively with the lumpiness due to the amount of cash being distributed and thus used for share repurchases. Current First Call eps estimates have MCD's growing earnings in the high single digits in the next three years, which, given the operational turnaround, could be conservative.
MCD's is trading at 13(x) Enterprise value to 4q trailing cash flow (hardly expensive), and is a perfect candidate for P/E expansion in a market totally vacant of such phenomena.
A move above $50 (and thus through formidable resisitance) for MCD's on good volume, and the hamburger king could run for a while.
position in MCD
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