McDonald's and Polo - Are the growth prospects already factored in to their prices?
Vijesh is a second-year Global MBA Candidate at the George Washington School of Business, specializing in Finance and International Business. Prior to joining MBA, he worked as an equity research analyst and a venture capital consultant. As part of the Ramsey Student Investment Fund, he is covering McDonald’s (MCD) and Polo Ralph Lauren (RL) in the Consumer Staples and Discretionary sector.
Business: Although the industry that MCD is operating in is rife with competition, MCD, owing to its brand equity, efficiencies of scale, and its presence in all segments of the vertical chain has been able to successfully safeguard its leadership position. Although, almost two-third of the company’s revenues is still earned from company owned restaurants, the management believes that franchising will drive the company’s future growth. Furthermore, the company has over the years, truly emerged from being an all-American brand to a truly international one. I feel that the company’s sound fundamentals coupled with its growth initiatives and international forays will ensure that the company does not shed its leadership status in the near future.
Management: After the sudden and unfortunate demise of two of its former CEOs, the company is currently under the able leadership of Jim Skinner who took over as the CEO of McDonald’s in late 2004. The fact that the stock price of MCD has almost tripled since his takeover is testimony of the market’s trust in his abilities. Some of the decisions by Skinner that have helped to turn around the company include his decision to venture in to international markets, improve menus and introduce coffee selections.
Balance sheet: The Company has a strong balance sheet with rich cash flows and other long term assets. MCD’s liquidity position is also pretty sound considering the fact that leading rating agencies have rated the company’s debt as stable.
Price: MCD is currently hovering near its 52 week high. Although, this may imply that most of the company’s growth potential has been factored in to the price, we believe that given the company’s sound fundamentals and its long history of rewarding shareholders, the stock will see further appreciation (although, limited).
Hence, I recommend a HOLD. Furthermore, investors with a long term perspective could also look at gaining entry in to this position in the event of any price declines.
Polo Ralph Lauren
Business: Ralph Lauren, with interests in the design, marketing and distribution of premium lifestyle products has been significantly affected by the global economic crisis. Consumers confidence levels and therefore, discretionary spending is at an all time low. However, Polo is seeking to reinvigorate growth in to the company by expanding in to international markets and introducing new products. This strategy has paid off, given that the company was actually able to increase its revenues in what was possibly the worst operating phase for the company. To give you a fair idea of the breakdown of the company’s revenues, Polo earns a significant share of the company’s revenues from its wholesale operations, followed by retail and then, licensing.
Management: The company has traditionally been owned by the Lauren family, with the Lauren family and its entities owning up to 86% of the voting power of the outstanding stock of the company. Although, Ralph Lauren has done a tremendous job in shaping the company to date, the company bears the risk of being overly dependent on one person. Therefore, the death or disability of Ralph Lauren in the future could have an adverse impact on the company’s business.
Balance sheet: The company’s balance sheet is sound, with strong cash surplus, implying that the company will be able to finance its growth internally. Not surprisingly, the company’s goodwill is valued at close to $1 billion and accounts for a significant share of the company’s non-current assets.
Price: The company’s stock is currently quoting close to its 52 week high, at a significantly high premium when compared to its peers. The current price translates in to a P/E of close to 20 which is on the higher end of the range for the industry. Hence, I feel that the company’s growth potential has already been factored in to the price and therefore, may not witness any significant upside from here on. The stock has developed a strong resistance at $95 and may not breach that price, until something significant happens.
My recommendation is therefore to SELL close to 95 and regain entry in to the stock at a much more attractive price.