Why We’re Not Lovin’ McDonald’s Stock Right Now

Scott Olson/Getty Images

Scott Olson/Getty Images

McDonald’s Corporation (NYSE:MCD) is a company that needs no introduction. Virtually everyone in modern society knows of the company and has visited one of their McDonald’s restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and/or Latin America. The company, which operates over 35,000 restaurants, has a stock that has rewarded shareholders over time.

In fact, this high yielding stock has doubled investor’s money in just over two years, but the stock seems adrift now. It has pulled back nearly 10 percent from its all time highs, and seems like it will be under pressure moving forward. This is because McDonald’s recent performance left a lot to be desired.

The company missed estimates on the top and bottom lines in its most recent quarter. Global comparable sales were relatively flat, reflecting higher average check and negative guest traffic in all major segments. Consolidated revenues increased just 1 percent year-over-year. Consolidated operating income was flat. Its diluted earnings per share of $1.40 was an increase of just 1 percent year-over-year, but there was a decrease in diluted weighted average shares outstanding. The growth just is not there right now. However, one reason to own the stock is that the company returned $1.6 billion to shareholders through dividends and share repurchases in the quarter. But the stock probably will not be moving higher any time soon.

Let’s dig a little deeper here. In the U.S., second quarter comparable sales decreased 1.5 percent while operating income rose 1 percent. Guest traffic was down. In Europe, comparable sales declined 1.0 percent and operating income was flat for the second-quarter. The UK and France delivered solid comparable sales and operating income results for the quarter. Germany’s quarterly performance reflected ongoing weakness. Asia/Pacific, the Middle East, and Africa (APMEA) second-quarter comparable sales increased 1.1 percent, reflecting strong comparable sales performance in China, as well as positive performance in many other markets. However, the results were impacted by continued weakness in Japan. APMEA’s second-quarter operating income declined 2 percent. Pete Bensen, McDonald’s Chief Financial Officer, stated:

“McDonald’s underlying financial strength and our ability to build long-term shareholder value have been hallmarks of our strategic plan. In keeping with this discipline, during the quarter we announced plans to return $18-$20 billion to shareholders through a combination of dividends and share repurchases between 2014 and 2016. This cash return target reflects a 10-20 percent increase over the amount of cash returned in the prior 3-year period and is based on several ongoing factors, including the significant free cash-flow generated from our operations, as well as the use of cash proceeds from debt additions and refranchising of at least 1,500 restaurants. These actions are a testament to our commitment to enhancing shareholder value.”

Looking ahead, 2014 is a year of rebuilding for the future of the business to help the company achieve its longer-term strategies. For example, McDonald’s U.S. is intent on strengthening the overall customer experience to effectively position the segment for long-term growth. Key areas of focus include service excellence, enhanced marketing, and value, core menu, and breakfast daypart initiatives. Heading into 2014, the company did not expect any material changes to the operating environment. Thus, full-year 2014 global comparable sales are expected to be relatively similar to last year. At this juncture, the stock will remain pressured. It is supported by its over 3 percent yield however, so shareholders will be paid to wait for a turn around. As such, profits can be taken here, but long-term shareholders should continue to hold.

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Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no plans to initiate a position in the next 72 hours. He has hold rating on McDonald’s and a $95 price target.

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