Market Insight: Weak Dollar Helps Expand McDonald's Operating Margins

McDonald’s Corporation () primarily franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world. All restaurants are operated either by the company, by independent entrepreneurs under the terms of franchise arrangements (franchisees), or by affiliates and developmental licensees operating under license agreements.

The company recently announced that it plans to open about 1,000 new restaurants worldwide next year. At the same time, it will refranchise or sell company-owned stores to franchisees – between 1,000 to 1,500 restaurants globally over the next three-plus years. China, Russia and India are targeted as significant growth markets internationally. About $225 million of an expected $2 billion in capital spending will be allocated to those countries next year. Plans call for 125 new restaurants across China and 35 to 40 in Russia in 2008.

The stock looks great fundamentally with tremendous return on equity and expanding operating margins. In addition, the declining U.S. dollar has fueled global profits. The latest earnings reported third quarter 2007 earnings of $0.83 per share. This represented a 27 percent increase on rising sales of everything from coffee and breakfast items to hamburgers and snack wraps.

Technically, the stock looks good, trading well above its 200-day moving average and an Elliott Wave-4 buy formation forecasting gains into the $64 per share area over the next few months. McDonalds has a very liquid options market with a very tradable bid/ask spreads. They also have LEAPS that currently extend out to 2010 allowing the options strategist to play this issue over the longer-term as well.

Figure 1:  Elliott Wave-4 Buy Pattern for McDonalds
(Source: Profit Source)

Happy Trading.

Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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