While a high p/e ratio can be a sign that a stock is overvalued, it can also be a signal that investors recognize the company’s future earnings potential. One example of a well-established stock with a high p/e ratio is the world’s most recognizable fast-food chain.
MCDONALD’S CORP. (New York symbol MCD; www.mcdonalds.com) is the world’s largest fast-food company by sales. Its 33,735 restaurants in 119 countries serve a wide variety of foods, but they are best known for their hamburgers and french fries.
The stock is down 12% since the start of 2012, mainly due to concerns about the company’s exposure to the slowing European economy.
Europe accounts for 42% of McDonald’s sales and 38% of its earnings. The company’s other divisions include the U.S. (34% of sales, 45% of earnings), and Asia (24%, 17%).
In the three months ended June 30, 2012, sales rose just 0.2%, to $6.92 billion from $6.91 billion a year earlier. However, if you exclude the negative impact of foreign exchange rates, sales would have increased by 5%.
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Stock investing: McDonald’s plans to spend $2.9 billion on new restaurants and renovations
Overall same-store sales rose 3.7% in the quarter. In Europe, same-store sales rose 3.8%, due to strong demand for lower-priced menu items. U.S. same-store sales gained 3.6% as the company launched new McCafe coffees and fruit smoothies. Same-store sales rose 0.9% in Asia; gains in China and Australia offset weaker sales in Japan.
Earnings fell 4.5%, to $1.3 billion from $1.4 billion a year ago. McDonald’s spent $856.2 million on share buybacks in the quarter. Because of fewer shares outstanding, earnings per share fell 2.2%, to $1.32 from $1.35. Unfavourable exchange rates also held back earnings: on a constant-currency basis, earnings per share would have risen 3.0%.
In 2012, McDonald’s plans to open 1,300 new restaurants and renovate 2,400 existing outlets. In all, it expects to spend $2.9 billion on these projects.
The stock trades at 15.9 times the company’s likely 2012 earnings of $5.55 a share. The $2.80 dividend yields 3.2%.
In the latest edition of Wall Street Stock Forecaster, we look at how well McDonald’s can support its high p/e ratio and maintain its dividend yield in the face of rising ingredient costs brought on by drought conditions in North America and the slowing European economy. We conclude with our clear buy-hold-sell advice on the stock.
COMMENTS PLEASE—Share your investment knowledge experience and opinions with fellow TSINetwork.ca members
Have you ever decided not to buy a fast-rising stock because its p/e ratio had gone too high for your taste?? Did you get to buy the stock later at a lower level? Or did you wind up paying an even higher price, or miss out on buying it entirely? Let us know what you think in the comments section below. Click here.
Comments
earl
I purchased MCD at about $91 several years ago on the recommendation of Motley Fool, which I follow (total portfolio up about 19%) and it went up about 15% and now sits about 2% below purchase price. YUMS has done much better over the same period of time.
I would like to see some discussion of the effects of drought, which evidence suggests will be multi-year, on the future of these companies.
Fast rising fastfood chains just like fastraising telecoms do crash even faster when they are coming down. McDonald being a little special of the fastfood chains because of its longvivity probably will not disappear over the next few years. However with new chains in this competitive business there is no guarantee in further growth.
I personnaly would never invest in a stock of a fast food chain because of the damage they do to millions of people with useless calories and lots of fat and sugar.
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I purchased MCD at about $91 several years ago on the recommendation of Motley Fool, which I follow (total portfolio up about 19%) and it went up about 15% and now sits about 2% below purchase price. YUMS has done much better over the same period of time.
I would like to see some discussion of the effects of drought, which evidence suggests will be multi-year, on the future of these companies.
We are long time holder of McDonald’s. Buy and watch. Add more when it becomes attractive. Even high p/e but has very attractive dividend.
thanks
Fast rising fastfood chains just like fastraising telecoms do crash even faster when they are coming down. McDonald being a little special of the fastfood chains because of its longvivity probably will not disappear over the next few years. However with new chains in this competitive business there is no guarantee in further growth.
I personnaly would never invest in a stock of a fast food chain because of the damage they do to millions of people with useless calories and lots of fat and sugar.