Does McDonald’s Belong in Your Portfolio?

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.

Among the latest wave of Silicon Valley newcomers is one well-established and rather unlikely tenant. TechCrunch reports that McDonald’s has launched a digital incubator on San Francisco’s Market Street — specifically in the Tenderloin neighborhood, where companies like Twitter (NYSE:TWTR), Yammer, Spotify, and Square have set up shop. Advertising Age reports that the tech hub, spearheaded by Amazon (NASDAQ:AMZN) and Yahoo (NASDAQ:YHOO) veteran Atif Rafiq, has hired engineers from eBay’s (NASDAQ:EBAY) PayPal, Facebook (NASDAQ:FB), AOL (NYSE:AOL), Yahoo, and Microsoft’s (NASDAQ:MSFT) Xbox. Rafiq said to Ad Age that the hub is intended to help McDonald’s grow the digital projects that will connect it with a younger, more digitally savvy consumer. He added that the San Francisco office will aid McDonald’s in attracting more talent to accomplish those goals, though the majority of its employees so far have come from Rafiq’s personal network.

The move comes as McDonald’s and its many competitors, like Burger King (NYSE:BKW) and Wendy’s (NASDAQ:WEN), try to make up for what has been a slow effort to embrace new tech that can change the traditional fast food experience. McDonald’s has been testing mobile payments after Burger King and Wendy’s began allowing customers to pay via a smartphone, Time reported in March. Both companies’ apps generate a code that customers use to pay at the register. That contrasts with the way Starbucks (NASDAQ:SBUX), which adopted a mobile payments system early on, in 2011, requires cashiers to scan customers’ phones. Scanning a customer’s smartphone works better for those who pick up their orders in-store rather than via the drive-thru. However, experts consulted by The Wall Street Journal consider the need to share the code an “extra step” in the Burger King and Wendy’s apps, one that could disappoint consumers looking to mobile payment apps as the ultimate convenience.

Though McDonald’s is currently testing its own mobile payments platform, it’s unclear when that system will roll out nationwide, or if it’s more similar to the Starbucks app or those developed by Burger King and Wendy’s. It’s also not clear if it will offer discounts or a loyalty program to encourage repeat customers. However, once the system is ironed out and in place, Rafiq’s intentions with the San Francisco office undoubtedly go far beyond mobile payments and the chain’s current mobile app. Consumers have already seen a hint of Rafiq’s ambitions with the 2014 World Cup augmented reality app that the McDonald’s french fry packaging encouraged them to download. Rafiq hasn’t specified what the San Francisco office’s staff is working on, but McDonald’s is clearly looking to build partnerships in the tech world.

T = Technicals on the Stock Chart Are Strong

McDonald’s stock has been moving higher over the last couple of months. 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 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

14.90%

43%

40%

What does this mean? This means that investors or traders are buying a significant 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 significant 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 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

4.59%

4.96%

13.91%

-3.84%

5.90%

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 company has launched a digital incubator on San Francisco’s Market Street. The stock has been moving higher over the last couple of months and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased. 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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