Is McDonald’s a Buy?

With shares of McDonald’s (NYSE:MCD) trading around $102, 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.

Fast-food workers have been continuing the fight for an increased minimum wage with protests in Washington and outside the of McDonald’s headquarters, where 100 of the 2,000 protestors were arrested. Workers, 325 of whom marched in their uniforms, according to Bloomberg, are demanding an increase to $15 per hour. The U.S. headquarters shut down and had its own employees work from home to avoid traffic from protestors. “The closing reflects McDonald’s refusal to address the growing concerns of workers and failure to take action to raise wages,” said Deivid Rojas, the communications director of the Workers Organizing Committee of Chicago, per Bloomberg.

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 highs for the year and looks set 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 signals neutral to bullish price action in the near-term.

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

14.92%

10%

8%

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

June Options

Flat

Average

July Options

Flat

Average

As of Monday, there is 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 been pleased with McDonald’s recent earnings announcements.

P = Excellent 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

5.12%

-1.11%

11.55%

-5.05%

3.62%

McDonald’s has been a relative performance leader, 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. Fast-food workers have been continuing the fight for an increased minimum wage with protests in Washington and outside the of McDonald’s headquarters. The stock has been moving higher over the last couple of months and is currently trading near highs for the year. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased. Relative to its peers and sector, McDonald’s has been a year-to-date performance leader. Look for McDonald’s to OUTPERFORM.

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