Full Disclosure Finance

By Andrew

On Friday morning I bought 25 shares of McDonalds (MCD) at an average price of $56.70 (adjusted for the trading fee). The stock proceeded to promptly drop more than 4% below my purchase price. The catalyst for the drop was a downgrade from a Friedman Billings Ramsey analyst saying that same-store sales growth could begin to slow this year due to lower prices from competitors or if the economy strengthens. Same-store sales growth, which is growth at stores open at least one year, is a key metric for restaurant and retail stocks. The analyst initiated coverage on the stock with a rating of “market perform” and a price target of $53 dollars. So I guess I should get out while I still can right? Actually I will probably use this oportunity to buy another 25 shares on Monday. I just wish I would have waited until Friday afternoon to make the original purchase. I’ve done my homework (thanks Cramer) and the analyst downgrade doesn’t change my opinion on the stock.

In the past two years McDonalds has demonstrated outstanding top and bottom line growth performance (Revenue & Net Income). The company’s annual revenue for 2006 grew nearly 26% compared to full year results of 3 years ago. Year-over-year quarterly sales increased 7.2% in the most recent quarter. They have beat or met consensus earnings estimates for the past 11 quarters and same-store sales increased from 3.9% in 2005 to 5.7% in 2006. Net Income for the most recent quarter increased by 19% compared to the same quarter a year ago. The stock trades at a Price-to-Earnings (P/E) ratio of 28x trailing 12-month earnings and 17x forward earnings (2008).

Recently McDonalds announced that they are going to expand their beverage lineup at its US restaurants to include cappuccinos, lattes, and other drinks. The move is expected to add $1 billion in annual sales. McDonalds also has great international exposure. The story on McDonalds is not domestic growth. The company is serious about focusing on global expansion, which is a key factor to my selection. I think that Micky D’s is a great defensive play in this time of economic uncertainty in the US. There have been a lot of questions lately about consumer discretionary spending due to weakness in the US economy and I believe that these recessionary fears will drive more customers to the Golden Arches and not less. Where else can you get an entire meal for like $6.

So what did I learn from this stock purchase? I should have waited until after the market open to set my purchase order. Originally I set up my limit order on Thursday night for about $0.80 lower than the previous day’s close. On Friday morning I noticed that the stock was down about 1% in premarket trading with higher than normal volume. I then lowered my limit order price by $1 anticipating that the stock would open lower. Aparrently $1 wasn’t enough. At the open the stock dropped significantly and my order was executed immediately. If I had waited until after the market opened I would have realized that the stock was headed much lower and I could have made the purchase 4% cheaper. So lesson learned…understand the direction of a stock before you set up an automatic trade request. I’m happy to get the chance to buy more MCD at a lower price and unless the stock opens significantly higher Monday morning I will be making another purchase. I believe that 2008 will be another strong year for McDonalds driven by their international growth initiatives and expanded beverage offerings.

Keep posted for more stock updates soon.