Surprising Vehicle For Capturing Europe's Upturn
McDonald’s (MCD) is heavily dependent on Europe. Sales in that region accounted for nearly 40% of sales last year, compared to the 32% revenue share for U.S. operations and 25% for the grab-bag, APMEA grouping (Asia, Pacific, Middle East and Africa).
The protracted recession and high unemployment across much of Europe goes a long way to explaining McDonald’s revenue slog since the financial crisis.
In August, McDonald’s delivered a bit of a Euro surprise. Same store sales in Europe had a much better than expected 3.3% rise , a pretty nice U-turn from the 1.9% same store decline in July.
Tweaking the lineup of core value meals is a centerpiece of McDonald’s Europe business, but management says it also benefitted from “premium food events” in Great Britain and Russia. The introduction of blended-ice beverages in the U.K. was also cited as a driver of the stronger Europe showing. A drier than normal August, and temps slightly above normal trend lines for the U.K. no doubt aided sales for the cool drinks; with fall descending it will be interesting to see if other segments can pick up the slack going forward.
To be clear, McDonald’s is still trending below its historic revenue growth pace; year to date same store sales are up just 0.2%. But the Europe pick-up is well worth keeping an eye on. While European unemployment remains painfully high, the Eurozone recession officially ended at 24 months when second quarter growth managed to tick positive. Meanwhile ever since ECB president Mario Draghi uttered his “by any means necessary” pledge in July 2012 to defend the euro, 2012 consumer confidence has been on the mend.
While growth has been exceedingly hard to come by, McDonald’s has managed to get more out of less. As this chart shows, revenue and earnings per employee have risen over the past two and half years, while operating expenses per employee has fallen.
With a 3%+ dividend yield and a dividend growth rate of more than 50% over the past five years, McDonald’s offers a compelling income source at a not-too-troubling valuation. Its 17.7 trailing PE ratio is less than half the level for restaurant stocks including Burger King (BKW) and Chipotle Mexican Grill (CMG) and well below the 23 trailing PE for Yum Brands (YUM).
While Darden Restaurants (DRI) has a lower trailing PE ratio and has more than doubled its dividend over the past year, McDonald’s offers the better sleep-at-night scenario, as its cash dividend payout ratio is lower and its dividend cover ratio higher than Darden.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.