Can McDonald’s Find Support Post-Earnings?

With shares of McDonald’s (NYSE:MCD) trading around $94, 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 reported earnings on Monday morning that showed the fast food chain has performed better this quarter than many of its peers, according to Reuters. McDonald’s reported a 4 percent rise in profit for the quarter with a net income of $1.52 billion, or $1.52 per share. In the third quarter of last year, McDonald’s posted $1.46 billion, or $1.43 per share. Analysts from Consensus Metrix only expected an increase of 1 percent.

T = Technicals on the Stock Chart Are Mixed

McDonald’s stock has traded sideways in the last couple of years. The stock is currently trending lower and is getting closer to lows for the year. 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 below its key averages, which signals neutral to bearish price action in the near term.

MCD

Source: Thinkorswim

Taking a look at the implied volatility 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

15.84%

46%

45%

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

November Options

Flat

Average

December 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 significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Rising 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’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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

6.29%

4.55%

2.44%

3.83%

Revenue Growth (Y-O-Y)

2.39%

2.43%

0.9%

1.9%

Earnings Reaction

-0.64%*

-2.68%

-1.95%

0.57%

McDonald’s has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have not been happy with McDonald’s’s recent earnings announcements.

*As of this writing.

P = Weak 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

6.92%

0.36%

16.91%

83.72%

9.43%

McDonald’s has been a poor relative performer, year to date.

Conclusion

McDonald’s is a well-recognized company that fulfills cravings and demand for quick and delicious food choices that many consumers across the globe enjoy. A recent earnings release has not pleased the markets. The stock has been trading sideways in the last couple of years and looks be headed lower. Over the last four quarters, earnings and revenues have been rising. However, investors have not been happy with recent earnings announcements. Relative to its peers and sector, McDonald’s has been a weak year-to-date performer. WAIT AND SEE what McDonald’s does this quarter.

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