Investing Lessons From A Hamburger

Tony Sagami

What can a hamburger teach you about investing? An awful lot if you peak underneath the pickles and lettuce and listen carefully to what the world’s biggest hamburger company tells you.

I’m talking about McDonald’s (MCD).

McDonald’s recently reported first quarter results that were pretty darn good. Sales increased by 9% to $6.1 BILLION. That’s a whole lot of Big Macs.

Profits increased to $1.2 billion, an 11% increase over the $1.1 billion during the same period last year. That worked out to $1.15 a share, which was slightly above Wall Street expectations. Same-store sales increased by 2.9% in the United States and by 4.2% at non-U.S. stores.

Those are just the headline numbers, but there were a handful of important facts that got my attention.

High Gas Prices May Help? Did you know that 60% of McDonald’s sales in the United States are purchased from drive-through windows?

Since all of us are spending more money on gasoline, that leaves less money for other things — like dining out. Will that be bad news for McDonald’s?

The company believes that pinched households will still eat out at lower-cost restaurants and expects high gasoline prices to have little effect on its business.

Hamburger Clue #1: There is no question that Americans will be forced to cut back on their dining out budgets but the value-oriented restaurants — McDonald’s (MCD) and Yum! Brands (YUM) — will be the least affected while mid-priced restaurants chains — Darden (DRI), Brinker International (EAT), and DineEquity (DIN) — may struggle.

The Pain Of Inflation. McDonald’s says it’s paying a lot more for three things: (1) taxes, (2) interest expense on debt, and (3) food. McDonald’s said its tax rate will rise from 29.3% it paid in 2010 to 30-32% in 2011 and moaned that its interest-rate expenses will rise from 5% to 6%.

The company buys a lot of beef, buns, potatoes, and dairy products and all of them cost more today. It all adds up “to significant increases in three months in virtually every item in our basket,” McDonald’s warned.

“Yes, we’ve got some headwinds,” said CEO Jim Skinner, who expects its food costs to increase by 4% to 4.5% this year.

Hamburger Clue #2: I’ve talked about food inflation several times in this column and talked about various ways to profit from rising food prices: 2 ETFs To Play China’s Inflation Problem and Three Ways To Gain From Grains.

Would You Like Fries With That? My teenage children tell me that fast food jobs are the worst, but I’ve always admired the training and promotion opportunities that McDonald’s offers its best workers. I know several high-level and well-paid McDonald’s managers who started off making hamburgers and french fries.

McDonald’s announced a national hiring spree that will add as many as 50,000 employees to its workforce. The company will add an average of three and four new staff at each store and increase McDonald’s workforce by 7% to 700,000 staff.

Hamburger Clue #3: Sadly, the United States continues to grow its service and government workforce but little else. The well-paying manufacturing and blue collar jobs have left for good. I have little faith in the jobless recovery that has recently been powering the U.S. stock market this year.

The Big Mac Index. Yup, there is such a thing. The Economist magazine uses the price of a Big Mac to evaluate the purchasing power parity of various currencies. If all currencies were fairly valued, the price of a Big Mac would be roughly equal in all countries.

A Big Mac costs $3.71 in the United States, according to The Economist. But it costs the equivalent of $2.18 in China and $1.90 in Hong Kong. That means a Big Mac is 41% cheaper in China than the United States and is 49% cheaper in Hong Kong than the United States.

Perhaps that is why the International Monetary Fund said last month that the Chinese yuan is “substantially below levels consistent with medium-term fundamentals.” Clearly, the Chinese yuan is undervalued and headed higher.

Hamburger Clue #4: The most direct way to profit from a rising yuan is to invest in the WisdomTree China Yuan ETF (CYB). Disclosure: My Asia Stock Alert subscribers already own CYB.

Look East For Growth. McDonald’s has 32,700 restaurants around the world with 14,000 of those in the United States. Clearly, McDonald’s is a global company, but it is becoming very Asian these days.

“McDonald’s is expanding faster in China than in any other market in the world,” said Kenneth Chan, CEO of McDonald’s China. The company plans to build 700 new restaurants in China within two years, which will bring its total Chinese locations to 2,000 stores.

McDonald’s has been in China for 20 years and understands that China will power its future growth.

Hamburger Clue #5: McDonald’s is doing well in China but Yum! Brands (YUM) is taking China by storm. Yum! Brands has 3,400 Pizza Hut and KFC stores in China and is building more as fast as it can.

McDonald’s is just one company, but because it has such a large international footprint, you can deduce a lot of investment clues from its results.

Best wishes,

Tony

P.S. If you are looking for more specific buy/sell recommendations on my favorite Asian stocks, please consider a subscription to my Asia Stock Alert for only $199 a year. I think it may be the best investment you’ll ever make.

Your thoughts on “Investing Lessons From A Hamburger”

  1. The Group at Weiss Research are head and shoulders above the rest of the pact.Tony’s articles are always very intresting and informing ,with some insights that others have over looked.I am concerned that America is loosing ground, inpart by the fact that a large percent feel that they are entitled to benifits provided by the goverment. We as a nation want everything given to us without any hard work or schooling or training.Clearly the free market economy played an important part in America’s rise in power, but for some reason alot of people want to abandon it and replace it with a socialized system.I believe for America to return to prosperity we will have to reafirm our faith in GOD and the free market system.

  2. Another great article by Tony Sagami.I really enjoyed your recent article on Chinese and other Asian countries valuing education much more than Americans.Today’s article mentioned 60% of McDonald’s sales come from the drive through window.Here in So California gas is about $4.20 a gallon.I’ve noticed a lot of idiot Americans in long drive through lines at our local McDonald’s.I’m not real optimistic on the U.S.,seeing the way Americans think and act.I expect the Chinese currency to be revalued up against the Dollar.It isn’t going to result in American’s getting high paying jobs producing Barbie dolls in this country.It will just cause us to pay a lot more for everything made in China,lowering our standard of living.

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