McDonald’s Reporting Strong Sales

McDonald’s Corporation (MCD) continues to report strong same-store sales, driven by the consumer trade down from casual dining, and menu variety. Global comps rose 7.7% in November (U.S. +4.7%, Europe +8.2%, APMEA +7.8%). EPS growth in recent years has been driven by margin improvement in the U.S. and Europe, strong comps on menu innovation, and currency gains as the U.S. dollar weakened.

Although comps are getting tougher and the U.S. dollar has strengthened, we think further growth is possible through margin improvement in APMEA [Asia-Pacific, Middle East and Africa], where company-operated restaurant margins lag the US by 120 basis points, G&A leverage and share repurchases. In 1H09, we expect headwinds from a stronger dollar, but think the dollar may weaken again if the U.S. government’s financial rescue programs stoke inflation.

With a strong balance sheet, we think this stock provides relative safety and moderate growth in a turbulent environment and exposure to faster-growing international markets.

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