Is McDonald’s Stock Finally a Buy?
With McDonald’s (NYSE:MCD) showing signs of stabilization after releasing disappointing financial results last month, is the blue-chip member a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
E = Earnings Are Increasing Quarter over Quarter
In October, the land of the golden arches reported its financial results for the third quarter. Net income fell to $1.46 billion ($1.43 per share), compared to $1.51 billion ($1.45 per share) a year earlier. Revenue for the company also edged slightly lower to $7.15 billion, compared to $7.17 billion in the same period last year. Analysts polled by Thomson Reuters had predicted earnings of $1.47 per share.
“While our sales momentum and current financial results reflect today’s challenging conditions, we continue to see significant long-term opportunities for brand McDonald’s and remain confident in the underlying strength of our business model,” said McDonald’s CEO Don Thompson. “We have the right plans in place to drive long-term profitable growth along with the experience and alignment throughout the McDonald’s System to navigate the current environment.”
It was the second consecutive miss for McDonald’s, and earnings have seen some declines over recent quarters. For the first quarter of 2012, earnings fell to $1.23 a share, down from $1.33 in the fourth quarter of 2011. Furthermore, the fast-food giant recently reported its first monthly sales decline in more than nine years. Global comparable sales dropped 1.8 percent in October, the first monthly decline since March 2003.
T = Technicals on the Stock Chart are Strong?
Stock charts can be a very controversial issue among investors. Some view it as simply junk science, while others believe it can be very helpful when making investment decisions. We believe technicals can be useful when taken into consideration along with fundamentals. Technicals often reflect investor sentiment and trader psychology.
As the chart below shows, investors turned cold on shares following the quarterly numbers and October sales decline announcement. McDonald’s gapped lower through its 50-day moving average and eventually hit a closing price of $84.05 on November 15. As we noted on October 19, McDonald’s has seen support between $84 and $86 over the past year, and a successful test of this range may signal the end of the most recent decline. This proved to be the case in June when shares dipped below $86 and the Relative Strength Indicator briefly fell below 30, which is considered oversold territory.
Although the stock market is still hostage to headline volatility from Congress and Europe, it is very encouraging to see McDonald’s find support in this range. We suspect that more broad equity weakness would affect McDonald’s in the short-term, but longer-term support remains near $80.
Investor Insight: Special Dividends for a Special Fiscal Cliff
E = Equity to Debt Ratio is Close to Zero
The debt to equity ratio is a measure of a company’s financial leverage. A high ratio generally represents that a company has been aggressive in financing its growth and operations with debt. While this may improve some metrics such as earnings in the short-term, too much debt can have disastrous effects in the longer-term.
Looking at the financials for the quarter ended September 30, 2012, McDonald’s has a very strong debt to equity ratio of 0.45. This includes total liabilities and total stockholder equity, with Treasury Stock added. In comparison, Chipotle Mexican Grill (NYSE:CMG), Jack in the Box (NASDAQ:JACK) and Wendy’s (NYSE:WEN) have ratios of 0.24 percent, 0.84 percent and 1.00 percent, respectively. Yum! Brands (NYSE:YUM) has one of the highest in the industry with a ratio of 3.06.
McDonald’s is a solid company overall. The global slowdown is certainly making its effects known, but the fast-food giant has solid fundamentals and improving technicals. In order to spur more demand, the company is also “going back to talk of the Dollar Menu.” Furthermore, McDonald’s recently declared a quarterly cash dividend of 77 cents per share, representing a 10 percent increase from the prior quarterly dividend.
Considering these components of our CHEAT SHEET investing framework, McDonald’s is a BUY for investors seeking a solid dividend player with upside potential. The company is also very friendly to shareholders, as it is schedule to return at least $5.5 billion through dividends and share repurchases this year.
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