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McLovin’

April 14th, 2016

 

 

When determining which stocks to invest in, there are several commodities and companies that are safe bets. However, one company that most people overlook when choosing stock is McDonald’s. Some refuse to invest in the company because their views are not aligned with the company’s actions (This is not surprising once you find out what’s really in your fast food and how it is prepared).

 

However, morals aside, the company has posted a growth of 267 percent on the S&P 500 in the last decade. In the last year alone, the company has grown 30 percent. This is quite significant for a company that has reported a decline in customer turnout multiple quarters in a row. Last year, McDonald’s saw three percent less customers through their door.

 

It appears to me that Americans are becoming more health conscious as compared to 10 years ago. That being said, fast food is not exactly the first choice of someone who is trying to eat healthier. The company’s Big Mac alone contains approximately 28 grams of fat.

 

According to a Consumer Picks Survey, McDonald’s was ranked lowest in food quality among its competitors like Burger King, Wendy’s, Sonic and In-N-Out Burger. So to what, then, can McDonald’s attribute its significant growth? Many attribute this growth to a change in leadership. On March, 1, 2015 Steve Esterbrook became Chief Executive Officer of McDonald’s, and made an array of changes right away.

 

The most notable and popular among McDonald’s customers was the decision to offer their breakfast menu all day  at most of its locations. This announcement in October 2015, led to a 5.7 percent increase in sales in the fourth quarter.  Other changes were made to the process of food preparation. The lengths of bun-toasting was made longer, and the drive through process was redesigned.

 

These changes show that the company is resilient in the past when faced with declining market conditions. However, the future is showing more adversity for McDonald’s. Labor costs for many companies are on the raise.

 

California, where McDonald’s was originally founded, and the state with the most McDonald’s locations, has just decided to raise its minimum wage to $15 per hour by the year 2022. Fourteen other states have also decided to raise their minimum wages since the beginning of 2016.

 

If a restaurant does not raise the prices of its food and is required to pay its employees more, it logically makes less money. This sort of scenario is called a decreasing profit margin. McDonald’s has experienced just that due to its rise in labor costs. The company’s profit margin declined 2.3 percent in the last year. I suspect that the company’s executives will likely raise the prices of their food slightly, find a way to do more with less workers, or both.

 

Although the company is facing negative customer food reviews and rising food costs, I have no doubt that McDonald’s will power through it. The company is so large now that it doesn’t really face any fatal risks.

 

I would be confident in advising someone to invest in the company, but only on a small scale. I would be hesitant to invest all of my money into the company until I know for sure how the company will perform with the raised minimum wage, and poor food quality reviews.