Valuentum Exclusive Analysis for the Discerning Investor

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On Friday, McDonald’s (MCD) reported first-quarter results that were yet again superb, reaffirming the company’s position as the premier restaurant in the fast-food space. Due to the excellent operating results and upward revisions in our earnings projections in the out-years, we are raising our fair value to $95 per share, with $114 per share now being the high end of our fair value range.

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McDonald’s drove global same store sales growth of 7.1% compared to the same quarter a year ago, highlighted by an 8.9% increase in same store sales in the US. By any measure, McDonald’s is about as saturated as possible in the US, but new products such as the Chicken McBites and the restaurant’s ongoing value proposition to consumers have helped fuel sales growth and profitability.

Even Europe, which has been plagued by fiscal austerity and recession, saw same stores sales expand 5% and operating income grow. McDonald’s ability to navigate even the worst economies continues to impress. Though management noted that it has poor pricing power in the stronger European economies such as Germany and France, the restaurant’s choice to pursue a value strategy has kept traffic from deteriorating.

Overall, McDonald’s saw earnings per share grow to $1.23, up from $1.15 a year ago, thanks in part to increased revenue and significant share buybacks. Though the firm expects currency to negatively impact earnings through the course of 2012, we think McDonald’s will continue to generate high returns on invested capital and expand in the face of current global economic headwinds.

Shares may be fairly valued today, but we intend to keep a close watch on McDonald’s for addition to our dividend growth portfolio. We think the firm is extremely shareholder friendly, and we expect the Big-Mac maker to have plenty of room to grow its dividend at a mid-single-digit annual pace in the future. McDonald’s returned over $1.5 billion in cash to shareholders in the first quarter, and we think investors that consider the firm’s shares at the lower end of our fair value range (and below) will be handsomely rewarded over the long haul.

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