The pursuit of healthy eating has not contributed to a decline in fast food markets. As Monik Kotecha shows, leaders of clever food operators can still make a buck.
Boutique fund manager, Insync, must be feeling quite satisfied with the decision to increase its holding in global food giant McDonald’s. Insync held McDonald’s in its Global Titans Fund for eight months before increasing the fund’s holding in the company in December.
The decision of Insync’s Chief Investment Officer Monik Kotecha to invest further in McDonald’s was largely driven by the appointment of 48-year-old Steve Easterbrook as new CEO for the hamburger chain last January.
“Steve Easterbrook, who was previously the senior executive brand president and chief brand officer at McDonald’s is a key catalyst,” Kotecha says.
Easterbrook, who has a reputation for a ruthless commitment to simplifying processes and speeding up service, adopted a turnaround strategy immediately following his appointment. He told a media conference in Canada this month [January 2015] that he set out very early to acknowledge at a global level that McDonald’s is in a turnaround situation.
“We should absolutely be in lockstep with where consumers were at, and universally we weren’t, despite the restaurant’s endurance in markets such as Canada, the UK and Australia,” he told the Canadian media.
Easterbrook is no stranger to a corporate change of direction. In 2006 he became the CEO of McDonald’s UK, overseeing more than 1,200 outlets. During his time he was credited with turning around the business in the region, by introducing a sharp focus on employee training, adding healthy options to the menu and implementing a major restaurant redesign.
“The early signs of his impact on the whole business appear to be positive with improving same store sales trends in international operations and stabilisation in the US,” Kotecha says.
Insync looks for a number of characteristics in a business which are reflected in McDonald’s performance. First, McDonald’s has a high level of recurring earnings with 75 per cent of operating profits derived by royalties and rent that provide stability in earnings. Second, the company’s focus on value in the food sector provides the business with a high degree of resilience through the economic cycles with positive earnings per share growth throughout the last recession.
Finally, no other fast food restaurant chain has the financial resources of McDonald’s. For instance, McDonald’s generates greater than 10 times the operating profit of Burger King and Tim Horton’s, greater than 30 times Wendy’s and greater than three times YUM Brands.
Insync’s view is that McDonald’s is undervalued as there is significant operating leverage in the business available through efficiency improvements. “That will drive greater margins which, when combined with improving same store sales, could lead to significant earnings growth over a number of years,” Kotecha says.
Prior to the purchase the stock had not performed as well as the market. During the 12 months to early December 2015, the stock traded between $US 96 and $US116, and more recently at $US123.
Insync believe that the stock could reach a price in the high $US120s over the next 12 months with the potential to go higher if same store sales in the US continue to increase over time.
Media enquiries
Mr Monik Kotecha
CIO
Insync Funds Management
p (02) 9216 2977
m 0413 768 480
e mkotecha@insyncfm.com.au