Can McDonald’s Recover?

With shares of McDonald’s (NYSE:MCD) trading around $95, 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 saw a key sales figure drop in the U.S. again last month, as the world’s biggest hamburger chain struggles to beat back competition and adapt to changing eating habits. The company, based in Oak Brook, Illinois, cited bad winter weather for a 1.4 percent decline at established U.S. locations. But it also conceded that “challenging industry dynamics” played a role. Globally, the company said sales declined 0.3 percent at locations open at least thirteen months. It warned that its muted performance so far this year could hurt first-quarter profit margins.

After years of outperforming its rivals, McDonald’s  has been fighting to hold onto customers and boost sales amid intensifying competition from chains like Chipotle (NYSE:CMG) and newer players like Five Guys Burgers and Fries. The company is looking at improving the image of its food and better matching its menu to the way people are eating. For February, McDonald’s said sales declined 2.6 percent in region encompassing the Middle East, Africa, and Asia. The company cited weakness in Japan and Australia, as well as a shift in the timing of the Chinese New Year.

T = Technicals on the Stock Chart Are Mixed

McDonald’s stock has struggled to make significant progress over the last couple of years. The stock is currently trading sideways and may need time to stabilize before heading higher. 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 signals 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

13.12%

3%

0%

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

Put IV Skew

Call IV Skew

April Options

Average

Average

May Options

Average

Average

As of Monday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

2.03%

6.29%

4.55%

2.44%

Revenue Growth (Y-O-Y)

1.45%

2.39%

2.43%

0.9%

Earnings Reaction

0.46%

-0.64%

-2.68%

-1.95%

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

P = Weak Relative Performance Versus Peers and Sector

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

McDonald’s

Yum Brands

Burger King

Wendy’s

Sector

Year-to-Date Return

-1.58%

1.68%

20.73%

7.74%

3.61%

McDonald’s has been a poor 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 saw a key sales figure drop in the U.S. again last month, as the world’s biggest hamburger chain struggles to beat back competition and adapt to changing eating habits. The stock has struggled to make significant progress and is now trading sideways. Over the last four quarters, earnings and revenues have been rising. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, McDonald’s has been a weak year-to-date performer. WAIT AND SEE what McDonald’s does this quarter.

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