Consumer

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

McDonald's Japanese subsidiary has had its share of problems in recent years -- potato shortages, expired Chinese meat, not to mention reports of a human tooth turning up in a serve of fries.

Its U.S. parent looks to be following the example set by Yum! Brands and taking steps to quarantine itself from a struggling Asian business. It plans to sell as much as 33 percent of the outstanding shares to reduce its 50 percent stake and has held meetings with five or so potential buyers, the Nikkei newspaper reported Tuesday. Investors who want to avoid indigestion should take their time before swallowing any shares.

For all the stomach-churning news that's emerged from the company over the last two years, there's reason to think it's on the mend. The business posted its first year-on-year increase in revenues since 2011 in the September quarter and should grow sales by 25 percent in the current quarter if it reaches its forecast of 200 billion yen ($1.65 billion) in full-year revenues:

Things Are Looking Up
Revenue at McDonald's Japan outlets, % change y/y
Source: Company reports

It's a similar picture when you look at sales from stores open at least 12 months. Sure, the numbers still have a minus sign in front of them, but by recent standards, it's a glowing result:

Rock Bottom
Sales from McDonald's Japan stores open at least 12 months have halted their slide
Source: Company reports, http://www.mcd-holdings.co.jp/english/financial/index.html

On top of that, you have the company's exposure to one of the better-performing sectors of Japan's economy. More Japanese are eating out as female workforce participation overtakes the U.S. and the weaker yen raises fresh food prices, making home-cooked meals less competitive. Three of the 10 most richly valued restaurant stocks globally at the moment are in Japan, according to data compiled by Bloomberg -- four if you include Australia's Domino's Pizza Enterprises, which counts Japan as its largest market with 45 percent of revenues.

Oblivious
McDonald's Japan shares have barely reacted to its woes
Source: Bloomberg data

The only problem is that McDonald's Japan is far from the cheapest item on the investment menu. Looking at its share price, you'd be hard pressed to spot the bits where the company announced 16 billion yen of one-time costs and forecast a 38 billion yen annual loss.

Price-earnings data isn't a very reliable yardstick for this business: Only one analyst is providing forward earnings estimates, Bloomberg data show, and there's not been a positive net income figure in six quarters so retrospective measures don't work either.

Comparing the price of McDonald's Japan to its sales or its net assets suggests shareholders would be better off buying Skylark, Colowide or Yoshinoya, which are all cheaper on most measures and have the virtue of being profitable. It's understandable the U.S. parent company wants to take the opportunity of this mispricing to offload stock at a decent sum. But investors who start eating without waiting for the shares to drift lower may be left with a bad taste.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net