McDonald’s and Starbucks
According to the investment advisory service Morningstar, there are two wide-moat stocks on sale at very rare discounted prices. Recently the company highlighted this in particular-although recent history shows that such reminders tend not to last long. On Friday (January 10), a few more statistics were added to that view: * McDonald’s Corp. (NYSE:MCD) and Starbucks Inc. (NASDAQ:SBUX) are both trading four-stars these days, according to Morningstar (Morningstar rates stocks between one star and five stars depending on value). In this analysis, I will look at either one using Guru Focus data to see if either might make for a good value pick or even as part of a larger portfolio.
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Morningstar has more than 150 independent analysts, all dedicated to the study of stocks. Different from bank and broker research, these analysts are independent and don’t look for investment banking business from the firms they cover. So they have less of a conflict than bank and brokerage analysts. And more believe ability. Still, Ronald Reagan said what he said about the Soviet Union after an arms control treaty: “Trust, but verify.”
The Golden Arches are synonymous with every American. McDonald’s Corp. (NYSE:MCD) is the world’s largest restaurant chain, with over 69 million customers daily through more than 40,000 outlets in 119 countries. The company boasts: It serves a Big Mac sandwich every 3 seconds of every day! Its store locator on-line, which includes maps and driving directions to each McDonald’s outlet in your area/down town or nearby road (they now also supports voice interface), is an industry pioneer technology-wise, and the interactive kiosk for food orders has begun to be implemented as well in some overseas markets.
McDonald’s business began with its first drive-in restaurant in the 1940 s, and from there has went through eras of change culminating with pioneering innovations, milestones and occasional problems. It is not only a fast food chain, but it is one of the world’s largest real estate companies: owning or taking long-term leases on both land and buildings for every location franchised by a franchisee.
Morningstar calls the company “We think that comparable sales will be in excess of 3% over the next five years as the company gets leverage from its vast global loyalty program of 150 million and counting. These customers spend twice what nonmembers spend, and are expected to grow to 14% of total customers by 2028 from the 8% today. We value McDonald’s stock at $312.”
According to Guru Focus, that assessment seems to be right on target. The stock is currently trading around its fair value as defined by the Guru Focus Value Line.
McDonald’s stock has a price-earnings (P-E) ratio of 23 which is rather high, but one should pay up for quality. While McDonald’s serves hamburgers to hungry customers, for us investors it’s like having a filet mignon. If you look at past statistics, earnings should grow by 5%. I wish it was a little bit cheaper, but on balance this is not such a bad place to begin a position.
