Thursday 8 August 2019 11:00 am Interactive Investor Talk

A food chain to get your teeth into

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By Rodney Hobson from interactive investor.

McDonald’s is spending money on developing personalised apps after upgrading its burger beef.

It made its name by being cheap and cheerful but food chain McDonald’s (NYSE:MCD) has long had a keen eye for innovation and for enhancing the quality of its ingredients, both of which generate welcome publicity. The successful formula is still attractive for investors.

The latest wheeze has been the introduction of fresh instead of frozen beef in its quarter pound burgers across the US to produce a “hotter, juicier burger”.

Over the past 12 months this has helped the chain to gain market share in the informal eating out category for the first time in five years, with an average 30% increase in sales of quarter pounders. That equates to 40 million more burgers in the latest quarter compared with the same period last year.

It was the biggest change for McDonald’s since it introduced all-day breakfasts in 2015 and it did come at a cost: specially designed packaging for fresh beef patties, special kitchen utensils and new refrigerators to maintain correct temperatures.

McDonald’s has also reduced the use of antibiotics in its beef and switched egg production away from battery hens.

On the acquisition trail

The group is up against tough comparatives from last year but in the latest quarter, to 30 June, it managed to increase global comparable sales for the 16th quarter in a row, this time by 6.5%, driven mainly by the UK, France and Germany. Earnings per share improved 4%.

McDonald’s never seems to stand still and the group has been on the acquisition trail this year in an attempt to retain a competitive edge. In April it bought a 9.9% stake in New Zealand-based mobile app vendor Plexure to increase functionality within its app-based technology.

Plexure will use the funds from McDonald’s investment to finance its expansion while McDonald’s will be able to use Plexure’s technology to tailor offers and sales to individual consumers on mobile devices. 

President and chief executive Steve Easterbrook says this type of technology is a key part of the company’s strategy, one that will be accelerated.

He expects great things from the Plexure tie-up. The two companies had already been working together, with Plexure powering a version of McDonald’s app in 48 countries outside the US, including Italy and Japan, but the new investment takes this cooperation to the next level. Plexure can no longer provide its technology to direct competitors of McDonald’s.

The previous month, McDonald’s bought technology company Dynamic Yield, based in New York and Tel Aviv. The technology will make instant suggestions to customers based on what they have already ordered, and also based on trending menu items and factors such as the time of day.

Gradual and steady rise

Food chains are one sector emerging relatively unscathed in the US from the trade wars with China, which has clamped down on food imports from America.

Food supplies for McDonald’s are thus relatively plentiful and cheap, while the growing American economy means more workers with more cash in their pockets to spend on eating out. McDonald’s, like other food chains, has been able to raise prices without driving customers away.

The shares have doubled over the past five years from just below $100 to just over $200 but there is no reason why the gradual and steady rise should not continue. At $214 they currently offer a decent yield of 2.2% and while the price-earnings ratio is a little tough at 27.7x there is no reason to feel that the shares are too expensive.

Hobson’s choice: I personally don’t like the food served by McDonald’s but the shares have proved to be more palatable. Buy below the recent peak of $215 if you can but it would not be wrong to go up to $220. 

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner’s guide to the stock market. He is qualified as a representative under the Financial Services Act.

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