Unlocking Value at McDonald's
04/09/2015 7:00 am EST
Larry Robbins is one of the more underrated hedge fund managers out there. He doesn't have the same notoriety as a Bill Ackman or Carl Icahn. But he runs Glenview Capital, which is a $20 billion hedge fund, says Marshall Hargrave in Daily Profit.
His fourth quarter letter to investors provides more insight into Robbins' genius. And the biggest standout is his conviction for the troubled fast food stock McDonald's (MCD).
Shares of McDonald's are up just 4% over the last year, which makes it one of the worst performers in the restaurant space.
But despite all the grief that McDonald's has gotten of late, it's still a force to be reckoned with. It has over 35,000 stores and an unrivaled geographical presence. The company also still generates double-digit profit margins that are some of the highest in the industry.
Robbins' recent letter isn't the first time he has mentioned McDonald's. At the Harbor Investment Conference in February, Robbins noted that his fund was buying shares of the fast food giant.
At the time, he alluded to the fact that it might be worthwhile for McDonald's to look into spinning its owned real estate into a new company, which would be a real estate investment trust (REIT). Recall that this is something that Bill Ackman was trying to push the company to do back in 2005.
But in his letter, Robbins lays out some other ideas to unlock value at McDonald's, one of which is better utilization of its balance sheet. The idea is that McDonald's should tap the favorable low interest debt markets to raise money to buy back shares.
In doing so, Robbins thinks McDonald's can return upwards of 25% of its market cap to shareholders by the end of 2016 and up to 50% if it took on as much leverage as its burger joint peers.
Robbins also thinks the valuation is compelling for McDonald's stock, meaning the stock looks cheap. Also, let us not forget about its industry leading 3.5% dividend yield. It has upped its dividend for 38 years in a row.
Yes, we still have the issue of declining sales and the question of whether millennials will ever embrace McDonald's. I think it's encouraging to see the company getting proactive, including recent plans to start testing all-day breakfast and the rollout of table service in Europe.
And, at a time when the S&P 500 is trading near all-time highs, McDonald's defensive properties are intriguing. As Robbins points out, food is in itself a defensive product (one that everyone has to have), but McDonald's is nicely positioned on the value end, which further insulates it from market turmoil.
In summary, you have one of the highest dividends in the restaurant space trading at an attractive valuation and you also have a $20 billion hedge fund on your side that's prodding the company to unlock value for shareholders.
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