McDonald’s Corp (NYSE: MCD) is the worlds largest restaurant chain employing more than 1.5 million people in 119 countries. Of their total 31,000 restaurants worldwide, just 1,200 are located in China, with only 175 open in India. With such a small presence in these two key markets, McDonald’s will look to aggressively expand operations in the next few years.

The company has increased shareholder dividends for 25 consecutive years, making it one of the S&P 500 Dividend Aristocrats. McDonald’s provides investors with a steady dividend (3.20% Yield), while still providing quality growth overseas. If you conservatively project expansion in these two countries based on US population and size the story is exciting. The United States has 300 million people and 14,000 restaurants. Together, China and Japan have 2.5 billion people with just 2,300 stores collectively. This disparity highlights the potential for expansion  in these key markets.

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Betting on Huge Growth from China to Reward Shareholders

Yum! Brands (NYSE: YUM ) operates well known fast food restaurant chains like Pizza Hut, KFC and Taco Bell. Collectively, the company has 36,000 restaurants in 110 countries. Despite having more overall units, Yum! Brands (22.5 Billion) has just 25% of the market cap McDonald’s (81-billion) has. Yum! is looking to even the score with its strong foothold in China and India.

The company has 3,500 restaurants already open in China, with just 100 units in India. Yum! Brands also forecasts an ultimate saturated restaurant goal of 20,000 stores in China alone – 600% growth on top of a 2.10% dividend!  It is important to note these emerging markets might not currently have the culture or disposable income to match the United States. However, with growth of the middle class and native currency appreciation it is our belief that fast food will be widely adopted into foreign cultures.

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Globalization and the expansion of the middle class in emerging markets will provide profit growth for each company. Other players in the market like Burger King (NYSE: BKC ) and Wendy’s Group (NYSE: WEN ) are largely irrelevant. Burger King was recently taken private again, while Wendy’s has negligible operations in these key markets. However, Wendy’s could soon follow in the footsteps of Burger King fielding private offers. Over the past 6-months takeover and buyout talks have been looming. In any case, consolidation and international growth should dominate headlines for the fast food restaurant business. McDonald’s and Yum! Brands will emerge as winners, while other companies struggle to find relevancy.

Disclosure: Author is long McDonald’s (MCD) and Yum! Brands (YUM) at the time of publication.


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Lower fuel costs at the pump have also eased concerns over discretionary income among McDonald’s patrons. Although the overall global economy has been weak, the company has been fairly resilient. This is in part due to a “trade down” in dining choices by consumers. When people can no longer afford expensive food they trade down to McDonald’s low priced menu offerings. This point was exemplified in 2008 when McDonald’s took away large market share from rival Starbucks. Consequently, Starbucks stock price got hammered while McDonald’s was one of the few stocks ending the year with gains.

“McDonald’s continues to deliver a relevant restaurant experience that provides consumers with a broad range of quality menu choices, affordable prices and unmatched convenience. Our underlying business performance remains strong. “  Chief Executive Officer, Jim Skinner

In its most recent earnings report McDonald’s (MCD) grew worldwide same store sales by 4.30% . This was while revenues dipped to $5.08 billion in 2009 from $5.61 billion the prior year. Now you might be wondering how same store sales can increase while total revenue decreases. Currency exchange rates play a major role in this phenomenon. Since McDonald’s is a United States based company, they must report financial figures in US Dollars. When the dollar increases, revenue earned in foreign countries is worth less when exchanged into dollars.

“In constant currencies, first quarter results reflect higher revenues, operating income and earnings per share over the prior year.” Chief Executive Officer, Jim Skinner

With more than half of McDonald’s total revenue coming from outside the United States it is easy to see how a weaker dollar helps earnings. Revenue generated in foreign countries gets repatriated at a better rate of exchange. With the United States Federal Reserve lowering interest rates to add liquidity to the credit markets and banking system, the dollar is sure to depreciate in value. This is a great thing for companies like McDonald’s trying to grow globally. Now when McDonald’s repatriates money out of currencies like the Euro and Yuan they will get more dollars in return.

Everything isn’t completely golden at McDonald’s though. One major challenge the company faces is integrating menu options over culturally diverse nations. Menu offerings from the United States don’t necessarily work in other parts of the world. McDonald’s will have to cater overseas restaurants to local tastes, integrating menu options to suit unique cultures.

McDonald’s stock offers a compelling, yet risk averse way to play the global growth story. While the United States has over 300 million people countries like China, Brazil and Japan have several billion. If McDonald’s can execute its growth strategy overseas like it did in the United States early on, you could see a major rise in stock price. Although this growth strategy may take five or more years to execute, the reliable 3.50% dividend allows you to get paid for waiting.

The stock price (MCD) has made a run off a lower support trend-line (see chart) and the 100-day moving average. Starting a position in the $53.00-$56.00 price range seems to be a good entry. A depreciating dollar, global expansion and lowered fuel costs are all reasons to be excited about McDonald’s. Furthermore, they have proven they can successfully operate in the worst economic environment in recent history. Although McDonald’s (MCD) isn’t the sexiest of stocks, we believe it will reward patient shareholders handsomely.

Disclosure: Author holds a long position in McDonald’s (MCD) common stock.