Buy McDonald's (MCD) in Jubak's Picks

05/23/2012 3:11 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Take a tour of a your neighborhood McDonald’s (MCD) and then of a Burger King and a Wendy’s. I think you’ll see that McDonald’s has separated itself from the competition. Yes, it’s still the place to go for a Big Mac, but the company now sells premium coffee, smoothies, and salads (and, yes, I’ve actually seen someone order and eat a McDonald’s salad.) A good number of the McDonald’s I’ve visited lately (research, research, research) have been re-freshed (the high-tech mix your own soda flavors machine is a blast). The company has found a mix that keeps the best of the old (I saw two teenagers order Happy Meals at lunch today) while adding the new (Iced Caramel Mocha, for example.)

I think Wendy’s is still a great basic burger experience. And, yes, the burgers at a specialized chain like Five Guys are better. But for variety of menu (I’ve never seen anyone order a hotdog at Five Guys), and price, I think McDonald's stands alone. The new competition isn't really fast-food burger chains but Starbucks (SBUX) and middle market restaurant chains. And in a soft global economy, I think I’d bet on McDonald’s in that competition.

What been most impressive to me about McDonald’s performance during the slow post-financial crisis economy in the United States and around the world has been the company’s ability to deliver value pricing and yet keep margins high even with commodity prices climbing. Operating margins were 31.6% in 2011 (compared to 3.9% at Wendy’s and 14.4% at Yum! Brands (YUM).) Standard & Poor’s calculates that operating margins at company operated restaurants were 18.9% in 2011 and will fall to 18.5% in 2012 due to higher commodity prices. But that small decline will still keep McDonald’s well ahead of competitors.

Companies that are as big and dominant as McDonald’s can find it hard to profitably re-invest earnings but McDonald’s does have one major market to conquer, China, where the company trails Yum! Brands’ Pizza Hut and KFC chains. McDonalds now has 1,400 restaurants in China (compared to 4,500 for Yum! Brands.) McDonald’s plans to open 250 new restaurants in China in 2012, up from 200 in 2011, but that leaves the company with plenty of overhead room.

I added McDonald’s to my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/ on Friday May 18 in my post http://jubakpicks.com/  As of May 23, I’m putting a one-year target price of $109 on these shares.

I know this is a tough market in which to buy anything. But here’s how I think of this buy. McDonald’s currently pays a 3.1% dividend yield—more than a 10-year Treasury and certainly more than any CD you’ll find. The price of the stock will, of course, vacillate and in the short-term you could lose money on these shares. But I think the chance of a permanent impairment of capital here is very small. (That is, I don’t think these shares will go down and stay down.) So I think this is a way to earn a better return than a 10-year Treasury and to eventually see an attractive capital gain.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December (although it did own shares of McDonald’s Latin American franchisee Arcos Dorados.) For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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