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2 Cheap Turnaround Plays: McDonald's and General Motors

2 Cheap Turnaround Plays: McDonald's and General Motors
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Friday, 13 November 2015 07:06 AM Current | Bio | Archive

Barron’s didn’t have much good to say about one of my favorite long-term stock holdings a few weeks ago (see “Thoughts on Kinder Morgan after the Barron’s Blast”).

But now it seems that we’re singing from the same songbook on two cheap turnaround plays: McDonald’s (MCD) and General Motors (GM).

I’ll start with McDonald’s. I started getting bullish on McDonald's in March (see “Dividend Smackdown” and “Musings on the McDonald’s Dividend”) and I bought shares of McDonald’s in my Dividend Growth portfolio in May.

Wall Street was almost unanimous in its hatred of the stock, and the share price had barely budged since 2011.

In my view, the sentiment that McDonald’s was doomed to terminal decline was ludicrous.

This is a company that has redefined itself multiple times over the decades, most recently about 15 years ago. And it’s been a veritable champion of shareholder friendliness throughout.

Let’s see what Barron’s had to say about McDonald’s:

From “McDonald’s Turns Around”:

    "After Mickey D’s released much better-than-expected third-quarter results on Oct. 22, the stock jumped 10%. The fast-food giant, with 36,000 restaurants around the world, reported that comparable sales at U.S. units were up 0.9%, the segment’s first rise in two years. Global comparables were up a robust 4%…

    Howard Penney, an analyst at Hedgeye Risk Management, an independent research outfit, says McDonald’s is evidencing a turnaround that will continue, leading the stock higher. Only about a third of the 32 sell-side analysts following the Oak Brook, Ill.-based company rate its stock a Buy. That’s a useful contrarian indicator, but there are other, fundamental reasons to like the stock.

    Restaurant companies fix themselves in the same ways, Penney says: “Slow growth temporarily, cut costs, and focus on the four walls.” That’s what McDonald’s has been doing since Steve Easterbrook took over as CEO last March, after years of corporate and stock underperformance. Prior to his arrival, the company had added dozens of new menu items and McCafé coffee offerings, increasing complexity in the back of the house and decreasing throughput…

    Speculation is rife that the company will unveil a “McREIT” this Tuesday at an analyst meeting, but Penney’s view doesn’t depend on a real estate investment trust (REIT) structure. According to a recent report from Morgan Stanley, McDonald’s owns about 45% of the land and 70% of the buildings in its “consolidated markets,” which include 27,000 restaurants around the world. Roughly half of its operating income comes from franchise rents."

“McREIT" is off the table for now, but we'll see what else management has up its sleeve.

Now let’s take a look at General Motors. I bought shares of General Motors.

This is what Barron’s had to say about it (from “General Motors’ Revival is Here to Stay”):

    "Year to date, the stock is up just 2%, but should be up far more. Consider that Wall Street’s 2015 earnings consensus has swelled by 11% since the end of last year. The 2016 consensus has grown 16%. The chief worry among GM skeptics today is that profits are close to peaking. That looks unlikely, but the next downturn, when it comes, could actually improve long-term sentiment on the stock by demonstrating that the much-improved car maker can remain solidly profitable in good years and bad.

    For now, GM (ticker: GM) looks likely to approach earnings of $6 a share by 2017, which would mark a three-year doubling. As that number comes into view a year from now, and as investors realize that GM’s new profitability is no fleeting fantasy, shares could hit $48, or eight times earnings, for a return of about 40%, including the dividend yield of nearly 5%."

I’ve said for a while that, come what may in the economy, auto sales are poised for a sustained rebound. The average age of cars on American roads is nearly 12 years. That’s the average of cars currently still in operation, not the average lifespan before getting junked.

But what if I’m wrong and new car sales really do continue to lag? As Barron’s continues,

    "Consider what GM’s profit statement would look like if the U.S. suffered a 25% decline in vehicle demand. It could look like it did in 2011, when the SAAR ended the year at 13.5 million vehicles. GM that year turned a $7.6 billion profit and reported EPS of close to $4. Results since then have been marred by a collapse in Europe and deep ignition-switch losses. But if $4 a share is the new bottom for earnings — or $3 a share, for that matter — the stock deserves a sharply higher price."

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Here are two cheap turnaround plays: McDonald’s (MCD) and General Motors (GM).
invest, stocks, mcdonalds, general motors
Friday, 13 November 2015 07:06 AM
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