Is McDonald’s a Good Portfolio Play?

With shares of McDonald’s (NYSE:MCD) trading around $101, is MCD an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

McDonald’s franchises and operates McDonald’s restaurants in the United States, Europe, Asia Pacific, the Middle East, Africa, Canada, and Latin America — so just about every part of the world. Its restaurants offer various food items, soft drinks, coffee, and other beverages, as well as breakfast menus. The products provided by McDonald’s fulfill cravings at competitive prices in convenient locations worldwide. The McDonald’s craze shows no signs of slowing, so the company has continued its expansion to just about every nation on the globe. As consumers continue to enjoy McDonald’s products, look for it to see rising profits.

McDonald’s said same-store sales rose slightly in May, but the burgers-and-fries giant continued to suffer weak sales in the U.S. The company has sought to boost flagging sales with a renewed focus on its core menu items, while updating its Ronald McDonald and Happy Meal branding. In May, the company worked to goose its U.S. sales with increased promotional emphasis on its value menu and breakfast, particularly its McCafe coffee offerings. Yet, the company cited “ongoing broad-based challenges” as it posted a 1 percent decline in same-store sales for U.S. restaurants open at least 13 months. Through May 31, U.S. same-store sales are down 1.2 percent overall, McDonald’s said. The company said systemwide sales in May rose 2.4 percent, or 3.4 percent excluding currency fluctuations. The company’s Asia/Pacific, Middle East and Africa region posted same-store sales growth of 2.5 percent, with strong performance in China reflecting a comparison against last year’s avian flu-pressured results. Several markets in the region posted positive results, the company said, although Japan continued to experience weakness. Same-store sales rose 0.4 percent in Europe, as positive sales in the UK and France were offset in part by declines in Germany. The company said it has tentative plans to release second-quarter results before the market opens July 22.

T = Technicals on the Stock Chart Are Strong

McDonald’s stock has been moving higher over the last couple of months. However, the stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, McDonald’s is trading above its rising key averages which signal neutral to bullish price action in the near-term.

MCD

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of McDonald’s options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

McDonald’s options

14.38%

26%

24%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on McDonald’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for McDonald’s look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-3.97%

2.03%

6.29%

4.55%

Revenue Growth (Y-O-Y)

1.44%

1.45%

2.39%

2.43%

Earnings Reaction

-0.35%

0.46%

-0.64%

-2.68%

McDonald’s has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about McDonald’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has McDonald’s stock done relative to its peers, Yum Brands (NYSE:YUM), Burger King (NYSE:BKW), Wendy’s (NASDAQ:WEN), and sector?

McDonald’s

Yum Brands

Burger King

Wendy’s

Sector

Year-to-Date Return

4.47%

5.33%

13.91%

-3.50%

6.05%

McDonald’s has been an average relative performer, year-to-date.

Conclusion

McDonald’s is a well-recognized company that fulfills cravings and demand for quick food choices that many consumers across the globe enjoy.  The company said same-store sales rose slightly in May, but the burgers-and-fries giant continued to suffer weak sales in the U.S. The stock has been moving higher over the last couple of months, but is currently pulling back. Over the last four quarters, earnings and revenues have been rising. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, McDonald’s has been an average year-to-date performer. Look for McDonald’s to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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