MCDONALD’S CORP. $94 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.0 billion; Market cap: $94.0 billion; Price-to-sales ratio: 3.4; Dividend yield: 3.3%; TSINetwork Rating: Above Average; www.mcdonalds.com) operated 34,480 fast food restaurants in 119 countries at the end of 2012. These outlets serve a wide variety of foods, including items tailored to local tastes, but they are best known for their hamburgers and french fries.

The company’s biggest market is now Europe, which provides 39% of its revenue and 37% of its earnings. McDonald’s other main markets are the U.S. (32% of revenue and 44% of earnings); Asia- Pacific (23%, 18%); and other countries, mainly Canada and Latin America (6%, 1%).

McDonald’s growing international operations increase its exposure to foreign exchange rates, which at times can fluctuate wildly. Unfavourable currency rates cut its revenue by 3.3%, from $23.5 billion in 2008 to $22.7 billion in 2009. However, revenue rebounded and rose 21.2%, to $27.6 billion, in 2012.

Same-store sales rose 3.1% in 2012, mainly on gains in the U.S. (up 3.3%), Europe (up 2.4%) and the Asia-Pacific region (up 1.4%). McDonald’s continues to benefit from strong demand for its value menu items, which typically sell for $1 and include foods like breakfast sandwiches and coffee. New premium and limited-time items are also boosting its sales.

Earnings rose 31.0%, from $4.2 billion in 2008 to $5.5 billion in 2011. Earnings per share rose at a faster pace of 43.6%, from $3.67 to $5.27, on fewer shares outstanding. Due to unfavourable foreign-exchange rates, earnings in 2012 fell 0.7%, to $5.46 billion. However, per-share earnings rose 1.7% to $5.36.

New rivals eye McDonald’s turf

McDonald’s is facing stronger competition from established rivals like Burger King and Wendy’s, as well as newer chains like Five Guys burgers and Chipotle Mexican Grill. In addition, coffee shops like Starbucks and Tim Hortons are selling more food.

In response, McDonald’s continues to launch new menu items, including foods like salads and apple slices that appeal to health-conscious consumers. Its restaurant improvements are also helping it attract new customers and encourage repeat visits.

In 2012, McDonald’s spent $2.9 billion on capital upgrades, with about half of that going into opening roughly 1,300 new restaurants. The company spent the other half on renovating 2,400 existing outlets.

This year, McDonald’s expects to spend $3.2 billion to open 1,500 to 1,600 new restaurants and upgrade another 1,600 locations. New outlets will account for more than half of its likely 2013 sales growth of 4%.

The company continues to shift more of its company- owned locations to franchisees. Franchisees and affiliates now own 81% of its restaurants.

Under its regular franchise deals, McDonald’s owns the land and building, while the franchisee pays rent and assumes the costs of upgrades and maintenance. That cuts McDonald’s risk. As well, individual owners are in a better position to adjust their menus and promotions to suit local tastes.

License deals open up new markets

The company continues to increase the number of outlets operating under developmental licences. Unlike traditional franchise agreements, developmental licensees own their outlets and pay the company a royalty based on sales. Developmental licences are a good way for McDonald’s to expand in countries that restrict foreign ownership of real estate, like China.

The company still prefers to own its stores in other overseas markets, such as Russia. However, it recently signed a new deal to let a Russian company open Mc- Donald’s restaurants in airports and railway stations.

McDonald’s can easily afford to keep expanding. As of September 30, 2012, its long-term debt was $12.8 billion, or a low 14% of its market cap. It also held cash of $2.2 billion, or $2.17 a share.

The company continues to buy back its own shares. Under its current authorization, McDonald’s can repurchase up to $10 billion of its stock. There is no time limit to these purchases.

McDonald’s also recently increased its quarterly dividend by 10.0%, to $0.77 a share from $0.70. The new annual rate of $3.08 yields 3.3%. The company has raised the payout each year since it first started paying dividends in 1976.

Reasonable p/e for an industry leader

The stock hit a record high of $101 in February 2012 but fell to $83 in November. That’s because investors feared that consumers would cut back on fast food due to the slow economy. But the shares have since moved up after McDonald’s reported better-thanexpected sales in the last two months of 2012.

The stock trades at 16.3 times the $5.75 a share that McDonald’s will probably earn in 2013. That’s a reasonable p/e ratio for a global leader in a steadily growing industry like fast food.

McDonald’s is a buy.