McDonald’s – great stock, shame about the price

McDonald's continues to go from strength to strength despite the global downturn as it continued to gain market share. In the three months to31December 2011, global like-for-like sales at the US fast-food giant grew by 7.5%, up from the 5% growth seen in the previous quarter. Total sales rose by 10% to $6.8bn, while operating profits rose by 14% to $2.1bn, boosting margins from 29.9% to 31.1%.

While McDonald's has benefited from favourable exchange-rate movements, it is clearly giving customers what they want by offering innovative menus and improving the ambience of its restaurants. Despite economic headwinds, Europe was the company's strongest market in terms of underlying sales, while profits in emerging markets continued to grow strongly.

The company should build on this progress in 2012. It plans to spend $2.9bn on opening 1,300 new restaurants while also refreshing 2,400 of its existing outlets.

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But is it worth buying? There's the rub. It's a great company, but it's not cheap. And since we last looked at the stock in October, the shares have risen by 7%. We continue to like the business given its defensive attractions, good returns on capital and strong cash flow. But we also still think the shares look fully priced on a rating of 17.3 times 2012 forecast earnings. What's more, the prospective dividend yield of 2.9% is hardly enticing. Hold.

The Numbers

Source: Bloomberg

Stockmarket code:MCD

Share price:$98.75

Market cap:$101bn

Net assets (June 2011):$14.9bn

Net debt (June 2011):$10.2bn

P/e (prospective):17.3

Yield (prospective):2.90%

The Analysts

Of the 29 analysts surveyed by Bloomberg, 21 say "buy" and 8 say "hold". There are no "sell" recommendations. The average price target is $106.6 8% above the current share price. Janney Montgomery Scott is the most bullish with a $115 price target, while Independent Research is most bearish with a $93 price target.