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Finanzas: Can The McDonald’s And Coke Marriage Stay Profitable?

Finanzas: Can The McDonald’s And Coke Marriage Stay Profitable?
Mayo 17, 2017

Autor/Fuente: SeekingAlpha 👤Periodista: María Luisa Ayala 🕔17.May 2017

 

Summary

  • The Coke at McDonald’s does actually taste better.
  • Both companies face headwinds from more health conscious consumers.
  • Business performance and valuations tell an interesting story.

Coca Cola (NYSE:KO) and McDonald’s (NYSE:MCD) both built extremely profitable businesses along the same time period, using each other’s strengths to complement their respective products. It became part of a marketing slogan, a version may be running today but I can’t completely recall, that Coca Cola goes with a burger like no other drink does. The presence of a Coke with popular burger joints is especially highlighted in their marriage with McDonald’s. Some people have sworn by drinking Coke or Diet Coke with their Big Macs. So much so, that folklore says that the Coca Cola at McDonald’s even tastes better than anywhere else. I’m amused and somewhat pleased to inform you that there’s actually a concrete business strategy to why this is the case. Firstly, the Coca Cola stored at McDonald’s is stored in stainless steel rather than everyone else who stores them in plastic bags. Secondly, McDonald’s closely monitors the temperature of its soda machines to ensure that the drink product will be the perfect amount of cold. It gets better. McDonald’s boasts that it filters its water at a greater level than competitors which enhances the flavor once carbonated and mixed with syrup. Yes, even the design of their straws is intentionally made bigger for a superior Coke experience.

The dominance of these two companies over the past several decades cannot be overstated. One of my favorite metrics to gauge how successful a business has been over very long periods of time is to see how many years they were able to grow their dividend consecutively. It will be very rare for a business to have been successful at doing this and still have mediocre returns in the stock market. KO has been doing this so well for so long that they’ve raised their dividend for 54 straight years. MCD has done it for 40 years. But the future is uncertain for both of these giants. In a way, they are being threatened by the same giant. The popularity of health awareness and the active purchasing of healthier food and drink products is cutting into these companies’ bottom line. While both stocks have called audibles to combat this reality through either the purchasing of healthy brands or the changing of recipes and menus, this concern among other headwinds have investors worried that these compound machines are soon to run out their course. Nobody can predict the future, but we can take a snapshot look at how the companies have done lately in a bigger picture regard. If we can step outside of the usual Wall Street time windows of focus, we have a better chance at crafting our own perceptions of the real long term health of the businesses.

Sugerimos: http://www.america-retail.com/finanzas/finanzas-target-a-critical-moment/

MCD data by YCharts

If you follow me at all, you know that I’m the first to say that both optimism and pessimism are overblown in the markets. When it comes to new technologies and consumer trends, I always defend that these take much longer to materialize in the form of profits and real growth than the market and general public likes to think. As a value investor, I’m often touting a lonely horn on stocks that are hated or feared by the market and urge people that some of these might actually be great values.

Most of you probably won’t like to hear this, but I think we’re seeing the trend away from fast food and soft drinks right before our very eyes – simply from the two charts above. Maybe there are other fast food stocks and soft drink stocks that aren’t hurt or maybe even thrive by these new trends and market conditions, but I can’t confidently say that MCD or KO are one of them. EPS or net earnings are fantastic measures of profitability especially over the long term. Shareholders’ equity is a fantastic measure of the stability or future potential of profitability over the long term. KO has been trending down on both of these for years in a time where much of the rest of the market has been raking in profits. Though MCD’s EPS seems to be improving, their shareholder’s equity as dropped to a negative number. This is extremely concerning for a number of reasons. In the case that the company were to close tomorrow, there would actually be no money left to pay shareholders. That negative number, by definition, means that the company has more total liabilities than total assets. It’s a scary proposition.

MCD data by YCharts

Depending on your strategy or approach, poor long term results can still be mitigated by a very strong margin of safety, a discount to intrinsic value that is so great that there’s almost no way to lose. Whether this is the case for either company right now is debatable, and I know there’s valid reasons for both sides of the argument. I’ll just say that with the valuations presented in the next two above charts, I don’t see enough of a margin of safety that would make me want to pull the trigger today.

MCD data by YCharts

However, I don’t see it as all doom and gloom. For many investors who are currently long MCD or KO, they may worry more about the sustainability of the growing dividend than they do about current valuations. In this regard, I think both companies are doing alright. From just looking at the growth charts, I would’ve guessed that the payout ratio was in a much worse situation than it actually is. To still have payout ratios below 75% means that earnings were relatively strong even if the current trend is negative. How much of the recent past indicates about the future is always a guessing game and either stock could rebound. As dividend investors, I’d watch the payout ratios closely. I personally wouldn’t hesitate on a quick sell with consecutive years of an over 100% payout ratio.

In the end, the MCD and KO marriage has been a profitable one for many investors. Some investors can credit one or the other stock for propelling them into financial independence and peace. Others still are hoping that these stocks can go on additional multi-decade runs. These are giant, well established businesses with long histories of success. If I had to make a pick, I’d say that KO will outperform MCD in the long term. Of course, my guess is as good as anyone else’s. Take what I say with a grain of salt, maybe with a tasty burger and Coke to go with it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

Fuente: SeekingAlpha

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