McDonald’s Shares — 3 Pros, 3 Cons: MCD

Despite its massive size, McDonald’s (NYSE:MCD) continues to cook up great results. In the latest quarter, announced last Friday, revenue increased by 16% to $6.9 billion and the company’s profit came to $1.4 billion.

Investors have definitely been impressed: Last year, shares of McDonald’s gained 26.6%. And this year, the return is 11.4%.

However, the valuation isn’t cheap, coming to about 19 times earnings. So should investors be cautious? Or will McDonald’s find ways to keep up its momentum?

Let’s take a look at the pros and cons:

Pros

Global play. About 60% of McDonald’s revenue comes from outside the US. What’s more, the footprint ranges across Europe, Asia and Africa. As should be no surprise, however, McDonald’s is getting lots of traction in China.

The franchise system also is critical to the company’s success. It essentially allows McDonald’s to scale its operations without using large amounts of capital.

Innovation. McDonald’s has a long history testing new concepts, like the drive-through window and the McMuffin. This creativity has been a key competitive advantage. In fact, McDonald’s has been able to attack some large market opportunities, such as going after Starbucks (Nasdaq:SBUX). McDonald’s also has been smart to offer healthier items, such as smoothies and salads.

Value. With a discount strategy, McDonald’s is benefiting from the slow economy. Even if there is more growth in the back half of the year, it is a likely that consumers will remain focused on things like the dollar menu.

Cons

Competition. McDonald’s must deal with extremely tough rivals, like Burger King and Subway. Interestingly enough, Yum Brands (NYSE:YUM) is putting lots of pressure on the company in China.

Saturation. In markets like the U.S., it is getting tougher to grow (in the latest quarter, sales increased by 4%). The fact is that McDonald’s already has a large number of locations. It has been able to find clever ways to find opportunities, such as with its new menu items, but it will get harder and harder to do this.

Inflation. While McDonald’s has the scale to negotiate better terms for its supplies, the company is feeling the pressure from input costs. To this end, it has increased prices two times this year. There are limits to how far McDonald’s can push this.

Verdict

Even with slow growth in the U.S. and tough competition, McDonald’s is still positioned nicely to provide steady growth for the long run. In addition, with its large cash flows, the company will have the resources to continue to innovate.

McDonald’s also has a decent dividend, which comes to 2.8%. In light of the benefits, the pros outweigh the cons on the stock.