McDonald’s released Q3 earnings this morning, and the fast food king affirmed its dominance. The company reported its 9th straight quarter of earnings gains, delivering a 9% increase in net income of $1.51B. The news sent the stock to a new 52-week high.
CEO, Jim Skinner, provided commentary on the company’s continued success. Most notably, he said,
“The investments we are making to optimize our menu, modernize the restaurant experience, and broaden McDonald’s accessibility with ongoing convenience and value platforms are driving profitable market share growth – a clear indication our strategy is working.”
The strategy McDonald’s has in place is called, Plan to Win. The strategy keeps the business geared towards the future to meet customer desires before they arise. Read more about McDonald’s “Plan to Win” strategy in this press release by the Financial Times.
Q3 Key Numbers
- Revenue was $7.17B, up from $6.30B in Q3 2010 (14% increase)
- Operating income was $2.39B, up from $2.10B in Q3 2010 (14% increase)
- Net Income was $1.51B, up from $1.39B in Q3 2010 (9% increase)
- Earnings per share dilutes was $1.45, up from $1.29 in Q3 2010 (12% increase)
Shareholder Impact
- The company repurchased 10.5 million shares of stock, bringing total share repurchases to $3B (talk about confidence in your company!)
- They declared a 4th quarter dividend of $0.70, a 15% increase
Tax Rate
- Income was taxed at a rate of 33.4% compared to 29.7% in Q3 2010. As outlined in the company’s 8k, the higher rate was a result of reduced tax benefits in foreign operations
What stood out to me?
I was impressed by McDonald’s growth in comparable sales abroad. McDonald’s has truly become a global enterprise as they penetrate new markets on a quarterly basis. Their customer base and brand recognition in the U.S. has been solidified for decades, and they are slowly achieving this same recognition internationally.
European sales growth was led by the nations of France, Russia, Germany, and the U.K. There was also robust revenue growth in the Asian/Pacific, Middle Eastern, and African markets (APMEA). The operating income of these markets grew 26%, even with the continued setback in Japan as a result of the earthquake earlier this year. Total revenue in the U.S. grew 5% compared to 16% in Europe, 20% in APMEA, and 22% in Corporate and other Countries (Canada, Latin America, and various corporate activities)
The sales growth abroad is remarkable, and many of the international markets remain untapped with vast room for growth. Although the potential for dramatic growth in the U.S. is limited, the potential for growth internationally is abundant. McDonald’s management has worked precisely to infiltrate international markets and secure their fast-food reign in these countries. McDonald’s execution in these markets will be paramount for future revenue growth.
I also look for McDonald’s to increase their exposure in the emerging markets, most notably the BRIC nations (Brazil, Russia, India, China). As these nations thrive and their populations grow, demand for food will increase. It is imperative that McDonald’s establishes a foothold in these countries to capture consumer demand. The company’s current expansion into Africa could also provide large future revenue streams as the continent is vastly underdeveloped.
Recommendation: BUY
Amidst the recent market downturn, McDonald’s has delivered another impressive quarter. Sales and revenue are growing and the trend is on track to continue. The company’s continued success will be driven by its ability to assimilate in international and emerging markets. They are committed to deciphering these markets and implementing menu items in line with the local culture. The “Plan to Win” strategy has proven successful over the years and reaffirms the company’s commitment to global expansion. As McDonald’s develops brand loyalty abroad, the revenues will follow suit. They have a proven business model and a strategy that works. Their continued execution domestically and internationally will be to the delight of shareholders. This is a stock that should be a bellwether of any portfolio.
The Stock Sensei 