1. Large space for expansion

It can seem that the golden arches are ubiquitous. In fact I reckon that the opposite is true. Instead of thinking about how many branches the company has, I am focussed on how few there are relative to the company’s potential.

The McDonald’s formula of affordable, convenient food has been proven to work well even in very diverse markets. As the global population increases and more people move out of poverty, I expect the market size for a company like McDonald’s to grow a lot in coming years.

There is no shortage of competitors, both local and global. Indeed, strong competition pushing down profit margins is a risk to the McDonald’s share price. But I like the fact that with decades of experience under its belt, McDonald’s has a proven formula and deep expertise. That should help it take advantage of growing market demand.

2. Post-pandemic eating habits

I’ve never fully understood the economics of drive-through or delivery for McDonald’s, as intuitively they feel like they distract from the simplicity of its store model.

However, given how much the company has been experimenting in that side of the business over recent years, it apparently reckons that such approaches can be a good way to build its business. The pandemic has changed some customer habits permanently. I think there will be a larger preference for contactless purchase, delivery, and the ability to buy food outdoors rather than going into a confined space to purchase it. McDonald’s growth in that area in recent years has therefore positioned it well to take advantage of this shift in customer demands. I expect that to translate into growing revenues.

3. McDonald’s shares are a broad economic proxy

I also like the fact that McDonald’s existing scale, especially in developed markets like North America, makes it a broad proxy for global economic health.

As we saw last year, some hospitality groups are highly sensitive to unexpected downturns in customer demand. That is also a risk at McDonald’s — but I think less so. The company’s pricing means that most customers don’t see it as a discretionary luxury. Even when a toughening economy leads to people tightening their belts, many consumers continue to buy McDonald’s meals habitually, whatever their economic means. With its fairly consistent customer demand and broad reach, I like the fact that McDonald’s isn’t overly reliant on a single market, or overly sensitive to economic circumstances like some competitors. 

Risks with McDonald’s shares

However, I am concerned that the company will struggle to stay relevant as customers focus more on the health impact of what they eat. That could hurt revenues and profits. I also reckon the company’s debt is a risk. Servicing it reduces money available to invest in the business or pay dividends. McDonald’s recently reported net debt of over $30bn.

Still, I would consider buying the shares for my portfolio. To me as a private investor, they’re the tastiest looking thing at McDonald’s.        

The start of the coronavirus pandemic sparked a mini-crash in March 2020. The Dow Jones suffered a 7.79% fall on 9 March, and then on 10 March, the FTSE 100 lost £125bn in value in just one day. 

Markets swiftly recovered and have since risen to record highs. However, across Europe, the UK, and US, central banks have kept interest rates below 1%. Governments have pumped hundreds of billions of pounds in quantitative easing and government support schemes into the financial system. The Bank of England expects inflation to hit 4% this year, and there’s rising concern over the delta variant. I think there’s a chance that the recovery is premature, and we could experience another stock market crash. 

I think these three stocks could help me to weather the storm.

Fast food

McDonald’s (NYSE: MCD) managed to actually make gains in the 2008 crash. This makes sense — in times of economic uncertainty, consumers appreciate the affordability of fast food. The company has been continually innovating. Most branches now have self service tills and offer delivery. Its app has been pushed aggressively, helping to increase cash flow by 12.8% to $6.3bn between 2017 and 2020.

There are downsides though. The share price hit its all-time high of $242 last week, leaving plenty of room to fall. In the wake of the pandemic, new taxes to reduce obesity could hit the fast food sector. In addition, its restaurants have had to increase wages to attract staff due to a significant labour shortage. With thin profit margins, this could hit profitability.

Value shopping

B&M European Value Retail (LSE: BME) is another stock I’d buy if there’s a stock market crash. It anticipates revenue of £4.8bn for FY 2021, an increase of 58.4% compared to FY 2018. The company is benefitting from the rapid growth of discount retailers, including the likes of Primark, Lidl, and Aldi. If there is a stock market crash, I think it’ll benefit from price conscious consumers with diminished disposable income. 

It shares a risk with McDonald’s. Its share price is at 555p, only 21p away from a high of 576p. In addition, it has competition from other budget chains like Poundland and Wilko. As many of its products are manufactured abroad, it could be hurt disproportionately by supply chain disruption, and increased transport and warehousing costs. 

Stock market crash 

British American Tobacco (LSE: BATS) is one of the largest tobacco companies in the world. In the 2008 recession, it lost very little of its value, and its share price now sits at 2,656p. In its earnings report last week, first half revenue increased 8.1% to £12.2bn.  It has a significant 8.0% dividend yield, double the FTSE 100 average, though it does have a substantial debt burden.

Tobacco is a declining market, so this giant will soon have to generate profits from diversification. Encouragingly, revenue from new categories increased 50%, due to cannabis and vaping sales. Its competitor, Philip Morris, plans to stop selling cigarettes in the UK within 10 years. 

I think it could lose investors on ethical grounds. There’s also a potential ban on menthol cigarettes in the US that could hurt profitability. However, it’s still a stock I’d buy in a stock market crash.

Indeed, London’s lead index is just around 15% below its level before the coronavirus crash. And it’s not the only buoyant market in the world. We’re seeing similar strength in the USA, Germany, France, Japan, Australia and many other places.

This FTSE stock market rally looks set to continue

Some investors have been sitting on the sidelines scratching their heads. And I can understand that attitude. How can the stock markets be so lively when we face the ongoing coronavirus pandemic and damaged economies because of lockdowns? Indeed, reduced revenues and profits look certain for many companies, at least for a while.

One big fear is the rally could be short-lived, and we may see another crash in the stock market. However, there’s a strong argument that a second crash may not happen. So, if you have been waiting for shares to drop back again before buying, you could be disappointed.

The stock market is good at looking ahead. And right now, I reckon it’s trying to predict where businesses will be with their trading a few months in the future. It’s looking past where they are now. But is that the right thing to do? I reckon so.

To begin with in this pandemic, I was worried that people may shun some of the things they did before. I wondered if fear of the virus might play a part in that, along with changing attitudes. Indeed, the lockdowns have encouraged us to reassess what’s important in our lives.

Pent-up demand

But seeing the queues for McDonald’s drive-throughs, KFCs and other retail outlets that have already reopened has caused me to change my mind. I now believe people will return to all the things they’ve missed in lockdown as soon as they can. And, to me, that means many businesses could see their revenues recovering faster than many imagine.

And that’s what I think this FTSE stock market rally is ‘telling’ us. Meanwhile, ex-Dragons’ Den personality and successful investor Richard Farleigh said something interesting in his book Taming the Lion.  He reckons that trending markets tend to move much further than we ever expect. So I think the current rally will run for a long time.

One thing that could help shares keep rising is the low-interest-rate environment and all the financial stimulus governments are throwing at economies. And if we stay out of shares because we fear a second crash in the markets, we could miss out on some decent gains.

My guess is that with all the experience gained in this pandemic, governments will control any potential second wave. So I’d say ‘right now’ is a good time to research and buy shares in strong, good-quality businesses. And there are plenty to choose between listed on the London stock exchange.

WASHINGTON, DC — At the end of this month, Starbucks  (NASDAQ: SBUX.US) is likely to post a result that will draw little attention, but is intriguing for its larger implications: The company will overtake McDonald’s  (NYSE: MCD.US) for the first time in pre-tax earnings in Japan.  McDonald’s, of course, has struggled in Japan recently. Its 50-owned Japanese subsidiary recently announced that it was closing 74 stores, or about 2.3% of its total store count, due to declining customer demand. Starbucks’ demand arc in Japan is quite another story — the company has gone from zero to more than 1,000 stores in less than 20 years. 

The two businesses’ trajectories in Japan are emblematic of a more global phenomenon. On nearly every continent, McDonald’s is struggling to maintain its growth momentum, while Starbuck’s has seemingly effortlessly posted a recent annual growth rate of 11.1%. McDonald’s is dealing with a number of factors crimping its revenues, the most prominent of which is a sea change in consumer preferences, for higher-quality, fast-casual establishments over quick-service chains like McDonald’s. Yet recently, the company has zeroed in on Starbucks as a threat to its business. Here’s Chief Operating Officer Tim Fenton during the company’s most recent earnings call, discussing the last quarter’s problems and mentioning Starbucks but not by name:

“… we lost some share based on our insights to non-traditional competitors, cafés, and bakeries.”

As Bloomberg reported a few days after this call, internally, McDonald’s has challenged its operators to protect its breakfast segment by winning what it deems a “coffee war” with Starbucks.

Will McDonald’s wrench significant amounts of market share from Starbucks with this new push? It’s doubtful. But CEO Donald Thompson understands that sometimes, to push forward a big strategic objective, you need to humanize the objective and create a villain that your troops can rally around to defeat.

The point of appearing to go to war

In this case, the strategic objective is simply to increase coffee-driven visits in the U.S., as such visits usually occur at breakfast, which accounts for 25% of company revenue. The strategy is likely informed by the chain’s recent experience in Canada. In 2008, career McDonald’s executive John Betts took over the company’s Canadian division. Along with upgrading McDonald’s Canadian locations to a more contemporary aesthetic, Betts implemented a plan to draw more Canadians into McDonald’s outlets with coffee, because Canada, similar to the U.S., is a coffee culture. 

Most notably, McDonald’s Canada began giving coffee away for free, first running this promotion in 2009. The emphasis on coffee won over skeptical Canadians, and since then, coffee sales in Canada have tripled, and breakfast has seen double-digit sales increases for the last five years. As Betts archly stated in 2012: “When you change someone’s coffee habit, you have got them.” 

In the U.S., McDonald’s can’t expect to triple its coffee sales in five years by giving away free coffee. When Starbucks was but a single crammed location in Pike Place Market in Seattle, and the company’s global footprint existed only as a network of neurons in Howard Shultz’s brain, McDonald’s provided by default the most widely available retail cup of coffee in the country. Today, the landscape has changed irrevocably. What McDonald’s can expect by pushing a “gold-standard cup of coffee with every visit” is to regain traction with wavering customers.

As CFO Pete Bensen stated during the company’s most recent earnings conference call, “If we lose relevance in coffee, then we are going to lose the transaction which yields food purchase.” In other words, if the company can direct more of the legions in need of a coffee fix through its arches during breakfast, the rest of the transaction will fall into place. It’s interesting how well Woody Allen’s famous quote that “80% of life is showing up” applies to a simple and well-reasoned corporate strategy like this one.

Toward this goal, McDonald’s has quietly laid the groundwork for increasing the quality, supply, and promotion of its coffee. Last year, the company announced that it was investing $6.5 million to assist more than 13,000 farmers in Guatemala and other South American countries, to scale up volume of high-grade arabica coffee beans, as well as to assist small-scale farmers with sustainable agricultural methods.

As for promotion, the company’s well-publicized push into packaged coffee through its new partnership with Kraft might be construed as an attempt to compete with Starbucks in the retail grocery venue, but it’s more immediately about heightening coffee brand perception. It is betting that U.S. incentives such as its “$1 any size coffee” at breakfast, coupled with McDonald’s-branded coffee in grocery stores, will keep its coffee top of mind versus Starbucks and other competitors. If increased business at breakfast eventually leads to additional sales of packaged coffee, as well as more non-breakfast visits, the company will take it as a bonus.

A reaction from Seattle

How is Starbucks responding to McDonald’s sudden pressure on the coffee front? By ramping up its new breakfast offerings, of course. This month, the company is introducing four new premium breakfast sandwiches, with enticing names including “Slow-Roasted Ham and Swiss” and “Vegetable & Fontiago.” Tearing off a sheet from the McDonald’s strategy notebook, Starbucks will offer a free Grande-sized brewed coffee with the purchase of a breakfast sandwich from March 12-14. Of course, Starbucks also has a larger strategy in mind, which is to generate a larger transaction per customer. Yet it speaks to the importance of the breakfast market that given a few more disappointing sales quarters from McDonald’s, or any sign of Starbucks’ vaunted growth slowing, and these two giants could be headed for confrontation after all.

WASHINGTON, DC — Investors seemed surprised by McDonald’s (NYSE: MCD.US) fourth quarter earnings report. The stock fell 0.9%, to $94.43. Admittedly, it caps off a disappointing year. However, long-term investors need not fret. There are compelling reasons to purchase the stock at this point, instead of rivals Burger King Worldwide and Wendy’s.

A venerable industry participant, it has proven its mettle throughout time.

Examining the results

Fourth quarter comparable sales fell 0.1%. On the bright side, the average check rose, but customer count fell. Total revenue, which includes new restaurants, rose 2%, to $4.7 billion, and operating income and net income were flat, at $2.2 billion and $1.4 billion respectively. However, thanks to share buybacks, diluted earnings per share rose 1%, to $1.40.

Examining results by region, U.S. comps declined by 1.4%, but operating income did manage to increase by 1%. This follows a couple months of lackluster top-line results. The company changed its menu offerings, with a Dollar Menu and More. McDonald’s offers more value, unlike competitors such as Burger King and Wendy’s. This seems like a smart pricing strategy. Since the segment managed to increase operating income despite falling comps, once customers accept the new pricing and flock to the restaurants, it should flow through to income.

The dollar menu for breakfast items such as the Sausage McMuffin remains in place. On other items, there will be more food. For instance, the Bacon McDouble has two beef patties, cheese, bacon, onions, ketchup, mustard, and pickles for two dollars. The Buffalo Ranch McChicken is still a dollar, or you can get bacon for a dollar more.

The Asia/Pacific, Middle East and Africa (APMEA) region was weak, with comps falling by 2.4%, and operating income sliding 8%. Japan continued to hurt results, and China and Australia were flat. McDonald’s has pledged to improve APMEA’s results by focusing on affordability and menu items catered to local tastes. Based on the company’s record of accomplishment of international expansion, with restaurants in over 100 countries, it would seem a good bet it will be successful. Europe was a relative bright spot, with comps increasing 1%, and operating income rising 3%.

Returning cash to shareholders

McDonald’s spent $1.3 billion on dividends and share buybacks during the quarter, capping off a year in which it shelled out $4.9 billion. The average diluted share count was 999.3 million, down from 1.01 billion in the year ago period. Meanwhile, the fast food giant pays $3.24 a share in dividends per annum.

This does not come at the expense of investing in its business, however. The company will spend $2.9 to $3.0 billion on capital expenditures relating to 1,500 to 1,600 new restaurant openings and giving makeovers to over 1,000 existing locations.

Final thoughts

The stock now trades at a P/E of 17, thanks to the stock’s decline over the past few months. The price is off about 9% since reaching over $103 last April. This compares favorably with fellow fast food purveyors.

Burger King trades at a multiple of 38 times trailing earnings. While its earnings more than doubled to $0.47 for the first nine months of 2013, there are high expectations of continued growth. The company did introduce the Big King sandwich, but it looks and sounds a lot like the Big Mac.

McDonald’s smaller rival Wendy’s trades at an astronomical P/E of 95. The company did manage to turn a profit, but it was a tiny $12.4 million, or $0.03, for the first nine months of the year. It will provide little comfort that it reported a loss of over $19 million, or $0.05 a year ago

Meanwhile, McDonald’s shareholders will get paid while waiting for results to improve. The shares have a 3.4% dividend yield, and the company has consistently raised its payout every year since 2008.

McDonald’s may require patience while waiting for top-line growth to resume. However, investors will enjoy the 3.4% yield while waiting. Patience is not only a virtue, it may also prove profitable.