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MEDILL/Aimee Yuyi Chen

McDonald's has more than 33,500 restaurants, both directly-owned and franchised, worldwide. Here, a McDonald's on Clark Street in the Loop.


McDonald’s shifting expansion plan to Asia: Analysts mixed in outlooks

by Aimee Yuyi Chen
June 06, 2012


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McDonald's/ MEDILL/Aimee Yuyi Chen

Following a pattern similar to annual earnings, McDonald's share price closed at $100.33 per share on Dec. 30, 2011. It peaked at $101.74 on Jan. 20, 2012.

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McDonald's/ MEDILL/Aimee Yuyi Chen

Affected by the recession, McDonald's annual revenue dropped to $22 billion in 2009, but the company continued to grow and reached $27 billion in 2011.

As McDonald’s Corp. holds the line in austerity-plagued Europe, which accounts for 40 percent of its revenue, and shifts expansion to Asia, the fast food giant continues to thrive, but analysts have mixed  investment advice.

The Oak Brook, Ill.-based company’s profit reached a high of $5.5 billion in 2011, up 11.3 percent from 2010 and more than double the income of $2.39 billion in 2007.

Revenue surged 12.2 percent to $27 billion in 2011, compared with $24 billion in 2010. The figure is 18.5 percent higher than the 2007 revenue of $22.8 billion.

Following a similar pattern, the company’s share price closed at $101.74 on Jan. 20, the highest in McDonald’s history. However, it dropped back to $87.11 as of Tuesday. It’s the lowest in six months and it has lost $11.73 this year.

Its price-earnings ratio is 16.25 as of Tuesday, higher than Standard & Poor's 500 Stock index’s 14.98.

Analysts are divided on the outlook. According to Bloomberg LP, 20 out of 31 analysts rate the stock as buy or overweight, while 11 rate it market-perform or hold. 

Sara Senatore, a senior analyst at Sanford C. Bernstein & Co. LLC, said McDonald’s faces great challenges this year including rising commodity costs and the austerity issues in Europe.

“McDonald’s continues to see softening traffic in France and Germany as new austerity measures were implemented in France and Germany and consumers continue to be deal-seeking,” she explained.

McDonald’s 2012 first-quarter earnings per diluted share climbed 6.9 percent to $1.23, compared with $1.15 per share a year ago, as net income rose 4.8 percent to $1.27 billion from $1.21 billion in the first quarter of 2011. Total revenue rose 7 percent, while same-store sales gained 7.3 percent.

Andy Barish, an equity analyst at Jefferies & Co. Inc., recommends holding the stock, predicting an 8 percent increase in earnings per share this year and a target price of $99. In a report he pointed out that the first-quarter EPS growth was in single digits for the first time since 2009, and the low- to mid-single-digit same-store sales “point toward slowing EPS growth.”

“Clearly the [favorable] weather was also a benefit of the first quarter, but I wouldn’t expect another big increase in the second quarter,” Barish said. “It’ll be a lot lower than that.”

However, John Ivankoe, an analyst at J.P. Morgan Securities LLC, believes McDonald’s shares have more potential and recommends buying them.

“McDonald’s continues to be a relatively low risk way to participate in a global cyclical recovery while insulating from operating cost pressure, especially commodities,” he stated in his research note. “We continue to recommend McDonald’s as a long-term core holding in the restaurant space for a relatively low risk [and] solid absolute return.”

McDonald’s does not provide guidance on earnings per diluted share, but the 2012 consensus estimate of adjusted earnings per share surveyed by Bloomberg News is $5.657, up from $5.27 earned in 2011.

The consensus target price of the stock is $106.36 per share, according to Bloomberg’s survey of 31 analysts.

According to the company’s annual report, McDonald’s will face greater challenges in 2012 as its cost of food supplies is expected to increase 4.5 to 5.5 percent in the U.S. and 2.5 to 3.5 percent in Europe.

The company expects full-year 2012 selling, general and administrative expenses to increase about 6 percent.

Its expected capital expenditures this year are approximately $2.9 billion. About half will be used to open new restaurants worldwide, the company said.

McDonald’s, which has more than 33,500 restaurants both directly-owned and franchised worldwide, implemented several new strategies in 2012 including adding staffing at peak hours, increasing restaurants that operate 24 hours per day and using hand-held order takers to improve the front counter service system in the U.S. Also, it plans to expand a remodel program to another 800 locations across the nation in addition to the 900 restaurants remodeled in 2011.

The U.S. market accounts for about 32 percent of McDonald’s annual revenue.

In Europe, although the company plans no new restaurants this year, it plans to remodel 900 restaurants, on top of the 900 remodelings last year. 

Compared with its Europe and U.S. markets, the fast food giant takes a more aggressive step in expanding in its Asia Pacific, Middle East and Africa market with a focus in China.

The company plans to open as many as 250 new restaurants in China this year, on top of the 200 restaurants opened in 2011. It will also double its workforce in China this year by hiring 70,000 people on top of the 80,000 employees now.

Including the China expansion, McDonald’s plans to open 750 new restaurants and remodel about 475 existing restaurants in its Asia Pacific, Middle East and Africa market by the end of this year.

McDonald’s increased the quarterly cash dividend per share 15 percent to 70 cents for the fourth quarter of 2011, bringing the annual rate to $2.8 per share. Overall, McDonald’s returned $6 billion to shareholders in 2011 through share repurchases and dividends paid.

The company's second-quarter earnings report is scheduled to be released on July 22.