Should You Consider McDonald’s?

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.

McDonald’s says it plans to start testing seasoned french fries at select U.S. locations starting Friday. The world’s biggest hamburger chain says the test of its “Shakin’ Flavor Fries” will take place at restaurants in northern California and St. Louis. Customers will be able to choose garlic Parmesan, spicy buffalo, or zesty ranch flavors. McDonald’s spokesperson Lisa McComb says the idea came from the company’s “Shake Shake” seasoned fries, which debuted in Hong Kong in 2005 before spreading to countries including China, India, and Australia. The website GrubGrade.com had published photos of the seasoned fries at a McDonald’s in Stockton, California, on Thursday. The packaging includes directions telling people how to pour the seasoning onto french fries in a bag and shake them. “As with all tests, we aren’t in a position to draw conclusions or make assumptions about the test since it is just beginning but we hope our customers in these two markets enjoy the new flavors,” McComb said in an email.

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

15.39%

36%

34%

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 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 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), Wendy’s (NASDAQ:WEN), and sector?

McDonald’s

Yum Brands

Burger King

Wendy’s

Sector

Year-to-Date Return

5.62%

0.19%

10.50%

-5.28%

3.75%

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. The company says it plans to start testing seasoned french fries at select U.S. locations starting Friday. 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 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.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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