Act Fast for Convenient McDonald's Profits

TheStreet.com

NEW YORK (TheStreet) -- Investors looking for great returns often complain about the perceived lack of value in the market, even as the Street focuses its attention on momentum growth stories. Although McDonald's may not be sexy as Chipotle Mexican Grill or Starbucks , there's been an overreaction to the company's presumed demise.

Yes, weak same-store sales and slower traffic have hurt McDonald's bottom line. But there's no evidence to support the drumbeat from analysts citing poor margins. It's not like McDonald's fourth-quarter earnings results were impressive. As with less-than-stellar performances from Yum! Brands and Coca-Cola , McDonald's absolute performance was not that far off from expectations. And with the stock down 2% so far on the year, these shares are once again on the value menu.

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With reported revenue growth of only 2% year over year and missing consensus estimates, I won't pretend that McDonald's ended the year on a strong note. Same-store-sales (comps, or the performances of stores open for at least one year) registered at just 0.1% and continue to be the main impediment to growth.

This wasn't much of a surprise, however. Save for Chipotle, the entire consumer discretionary space has struggled this earnings season, including so-called "recession-proof stocks" like Wal-Mart . In that regard, as with Wal-Mart, McDonald's management has dealt with issues (I won't say distractions) regarding what many believe to be poor wages for the company's frontline workers.

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As a result, some concessions were made. And this led to earnings being essentially flat at $1.40 billion with earnings per share advancing to $1.40. This was enough to beat Street estimates by 1 cent. I'd say management deserves credit for effectively managing costs. The Street, meanwhile, opted to focus more on how McDonald's compared to Chipotle. Investors have begun to buy into this comparison. But this makes absolutely no sense.

First and foremost, beef and labor costs have risen steadily for McDonald's. Sluggishness in the Middle East (comps declined 2.4%) has taken a meaningful toll on the company's past three quarterly results. These, by contrast, aren't the same issues with which Chipotle must deal. From that perspective, the Street's sudden fixation on McDonald's quarter-to-quarter performances misses the big picture.

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Despite the downbeat results in overall comps, McDonald's actually performed extremely well overseas -- particularly in Europe where same-store-sales rose 1.0%. Management attributed this to strong growth in areas like the UK, Russia and France. And the company's new breakfast initiative is expected to continue to drive higher sales in the coming quarters.

In the coming quarters, management expects global same-store sales be consistent with what they've been in recent quarters. So, while things are not going to get immediately easier for McDonald's, the company's revenue and earnings growth expectations for the current year suggest that there's no reason to think that the company is in danger of losing its value status.

With the company's continued focus on service, value and innovation, McDonald's still has what it takes to emerge out of this rut to drive solid long-term profits. Regardless of how pessimistic the Street may get, astute investors shouldn't put too much emphasis on one quarter, especially given the size and scale of this company.

It's not often a great business like McDonald's presents investors with so many chances to buy at significant discounts to fair value. With the Street now in fear of the company's near-term outlook, I believe now is as good a time as any to add to an existing long position. The stock is posed to regain its $100 mark by the second half of 2014.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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