Buy, Sell or Hold: With its Laser Focus on China, It's Time To Buy McDonald's Corp. (NYSE: MCD)

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Since the start of the global financial crisis in 2007, the economic slowdown that Western nations have experienced has been offset on a worldwide basis by the strong growth that we've seen in the developing markets.

These emerging economies have become the engines of growth in a developed world that's wrestling with widespread overcapacity that spans multiple industries. That's why the emerging markets represent some of the last real growth opportunities for large, multinational companies.

And when it comes to the world's emerging markets, China is the 800-pound … dragon.

In China, the rapid growth in car ownership along with the development of a major-and-growing middle class has led to a change in food consumption patterns in major cities. The old way of doing business is running into a new generation of consumers, with different expectations.


Today, China is the largest car market in the world. And with that heightened demand for cars and trucks, investors can count on an escalating demand for auto-based services – such as drive-through fast food.

A number of companies are poised to benefit. But for investors, one in particular is a slam-dunk "Buy."

I'm talking about fast-food pioneer McDonald's Corp. (NYSE: MCD).

Anatomy of a Global Heavyweight

Founded in 1948, McDonald's has since grown into a global heavyweight: It has 31,000 restaurants spread among 117 countries, and it employs 1.5 million people. The company has a market value of about $78 billion, and an enterprise value (with debt figured in) of about $86 billion.

McDonald's is a "Buy" in today's global marketplace, for four key reasons:

  • The company is posting 4.8% global comparable sales growth in the current post-financial-crisis economy.
  • It is big in China, where the company is going to double its franchises in the next three years.
  • It is doing a great job in embracing China's newfound position as the world's No. 1 auto market.
  • It's even bringing new ideas – such as "McDelivery" – to densely populated city markets in Mainland China.

Let's take a closer look.

McDonald's stock, which closed Friday at $74.05, is trading more or less in the middle of its 52-week range of $62.54 to $80.94. During that time, the shares have returned 14.75%, slightly lagging the Standard & Poor's 500 Index's 18.5% return of for the same period.

Its current forward dividend rate is 3.3%.

The company saw its global comparable sales rise by 4.8% in November 2010 over November 2009. This growth was driven by increases of 4.9% in both U.S. and European locations.

For McDonald's, overseas is where the action is.

And China is the market that's experiencing the fastest growth in "Mickey D's" outlets.

Enter the Dragon

McDonald's, a company that grew up selling Americana to the masses, has turned its energy toward feeding the Red Dragon.

The iconic drive-through restaurant is now in a rapid building curve that will see the company double the number of restaurants it has in China – currently more than 1,100 – by 2013.

China's economy is now the world's No. 1 car market. And now that Chinese consumers have wheels, they increasingly want their food "to go." That means that the drive-through restaurant is coming to China.

It also means that McDonald's is pushing a remodeling program that will add drive-through service to any location that permits it. This is part of a broader makeover initiative that will give the company's 1,100-plus China locations – which employ more than 60,000 in total – an updated look and feel.

As China's consumers become more discerning, and their demands escalate, McDonald's will have to regularly add new products and services – reaching well beyond any conventional menu offerings.

In most major cities in China – which are densely populated – McDonald's offers a unique service called "McDelivery." The home-delivery service, along with other market-specialized approaches, has helped propel an organic growth in domestic demand in China.

"China has been the fastest-growing market for McDonald's worldwide with regard to new restaurant opening," Kenneth Chan, the chief executive officer of McDonald's China business, told reporters in Beijing. "It took us almost 19 years to reach 1,000 restaurants. We will get our next 1,000 restaurants within three years."

The long-term stability of McDonald's gives us an investment that is globally diversified. It pays a steady high dividend, making it a favorite of defensive-minded portfolio managers.

It should be a favorite of yours, as well.

Action to Take: "Buy" McDonald's Corp. (NYSE: MCD), making sure to follow our guidelines below (**). McDonald's is a highly liquid stock with a very liquid options market. It pays a nice healthy dividend, with the same payout as a 10-year U.S. Treasury bond. Let's consider putting McDonald's into our income-generating portfolio.
Let's look to pick up half of our position at market now. The stock is currently trading for $74.05 per share.

Once you have your shares, let's look to write a "covered call" for every 100 shares you purchased. I like the March 75 strike calls (Symbol MCD110319C00075000). Those calls are currently going for 74 cents x 75 cents. We can lower our cost basis to $72.75 per share by providing upside leverage to someone else. If the stock is above the $75 strike on March 18, we will have locked in a nice tidy return in six weeks.

For the second half of the position, let's look to write a single "naked put" at roughly 5% below the current market position. At this time, I like the $70 strike for March. Currently trading for 59 cents x 60 cents (Symbol MCD110319P00070000). If the stock closes between $70 and $75 on March 18, we will have collected the extra cash for providing downside insurance to someone else.

(**) Special Note of Disclosure: Jack Barnes holds no interest in McDonald's Corp.

[Editor's Note: "Buy, Sell or Hold" columnist Jack Barnes started his career at Franklin Templeton in 1997, working in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries. He launched his own RIA shop in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008. Barnes - the author of the popular blog, "Confessions of a Macro Contrarian" - retired to the beach in the summer of 2009, and continues to write from there now.]

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  1. Share Tips | February 7, 2011

    I think the research , which is done in MCDONALD , is very good, because current forward dividend rate is 3.3%., so I think it is good time to invest..

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