Where Will McDonald’s Go Next?

With shares of McDonald’s (NYSE:MCD) trading around $100, 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 stock lost 0.5 percent to $100.53 on Wednesday, and has slipped 0.8 percent since the end of April, after running up 7.7 percent over the previous three months. Meanwhile, shares of rivals Wendy’s (NASDAQ:WEN) have gained 2.5 percent since the end of April, Burger King (NYSE:BKW) has advanced 3.4 percent and Jack in the Box (NASDAQ:JACK) have rallied 12 percent. And while it’s a stretch to think of McDonald’s burgers as gourmet, Red Robin Gourmet Burgers (NASDAQ:RRGB) have climbed 6.4 percent in two months. The latest Consumer Reports survey showed that of all the major U.S. burger chains, McDonald’s hamburgers were the worst tasting. The results are based on responses from 32,405 subscribers to Consumer Reports, and more than 96,200 dining experiences at 65 fast-food and fast-casual chains. So it’s no surprise that McDonald’s U.S. same-store sales fell 1 percent in May from a year ago, were flat in April and declined 1.7 percent in the first-quarter. “More and more, food quality — not just low price — is emerging as a deciding factor for many Americans when choosing where to spend their dining dollars,” said Tod Marks, senior projects editor at Consumer Reports.

T = Technicals on the Stock Chart Are Mixed

McDonald’s stock has struggled to make significant progress. However, the stock is currently trading near all time highs and looks poised to continue. 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 between its rising key averages which signal neutral 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

14.40%

30%

28%

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

August Options

Average

Average

September Options

Average

Average

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

4.08%

9.09%

19.51%

-2.01%

8.66%

McDonald’s has been an average 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 latest Consumer Reports survey showed that of all the major U.S. burger chains, McDonald’s hamburgers were the worst tasting. The stock has struggled to make significant progress, but is currently trading near all time highs. Over the last four quarters, earnings and revenues have been increasing. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, McDonald’s has been an average year-to-date performer. WAIT AND SEE what McDonald’s does this quarter.

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

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