MCDONALD’S CORP. $65 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.1 billion; Market cap: $71.5 billion; Price-to-sales ratio: 3.1; Dividend yield: 3.4%; WSSF Rating: Above Average) is the world’s largest fast-food company by sales. It has around 32,500 restaurants in over 120 countries.

Rising prosperity in developing countries is making McDonald’s food more affordable to more consumers. Overseas markets now supply 65% of its revenue, and nearly half of its earnings.

McDonald’s sales rose 15.0%, from $20.5 billion in 2005 to $23.5 billion in 2008. Sales fell 3.3% in 2009, to $22.7 billion. That’s because the rising U.S. dollar hurt the contribution of its international outlets. If you disregard foreign-exchange rates, sales would have risen 2% in 2009. Overall same-store sales rose 3.8% in 2009, mainly on gains in the U.S. (up 2.6%), Europe (up 5.2%) and the Asia Pacific region (up 3.4%).

Earnings rose 81.3%, from $2.5 billion in 2005 to $4.6 billion in 2009. Earnings per share rose 101.5%, from $2.04 in 2005 to $4.11 in 2009, on fewer shares outstanding.

New menu items are part of the reason for the higher 2009 sales and earnings. The company recently started selling premium coffees under the “McCafe” name. These are helping it compete with upscale coffee chains like Starbucks.

Expanded Dollar Menu will help sales

The company is also expanding its Dollar Menu, which features several items priced at just $1. This should help it spur sales in the face of high unemployment in the U.S. Food prices have stabilized in the past year, so adding more items to the Dollar Menu should not hurt the company’s earnings.

McDonald’s continues to sell more of its restaurants to franchisees. This lets the company collect more rent and other fees. It also cuts McDonald’s risk, because local owners assume the burden of store upgrades and expansions. At the end of 2009, franchisees operated 81% of McDonald’s restaurants, up from 80% a year earlier.

This year, the company will spend $2.4 billion to open 1,000 new outlets. It will also renovate 2,000 existing locations. Remodelling older stores tends to encourage repeat visits and increase sales. Together, these moves should push up McDonald’s 2010 sales by 2%.

The company can easily afford these investments. Its $10.7 billion of long-term debt is a low 15% of its market cap. McDonald’s also holds cash of $2.2 billion, or $2.04 a share.

McDonald’s should earn $4.42 a share in 2010. The stock trades at 14.7 times that estimate.

McDonald’s is a buy.