Can McDonald’s Grill Up Higher Prices?

With shares of McDonald’s (NYSE:MCD) trading around $96, 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.

As the world’s largest fast food chain, McDonald’s has been blasted for its wage practices for years. However, this month the government is ready to step in. According to Bloomberg, Democrat members of the U.S. Congress are encouraging McDonald’s, along with a handful of other fast food chains, to raise wages for their store workers, communicating with them via a letter signed by representatives. Fifty-three members of Congress wrote in a letter that was mailed to restaurant executives Wednesday, “Too many hard-working families are being forced to depend on poverty-level wages. Paying fair wages and putting more spending money in the hands of consumers will strengthen our economy.”

T = Technicals on the Stock Chart are Strong

McDonald’s stock has traded sideways in the last couple of years. The stock is currently surging higher 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 between its rising key averages which signal neutral 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

12.07%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

December Options

Average

Average

January Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral 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’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%

0.90%

1.90%

Earnings Reaction

-0.64%

-2.68%

-1.95%

0.57%

McDonald’s has seen increasing 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.

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), Wendy’s (NASDAQ:WEN), and sector?

McDonald’s

Yum Brands

Burger King

Wendy’s

Sector

Year-to-Date Return

9.51%

11.94%

29.44%

81.91%

17.96%

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. Democrat members of the U.S. Congress are encouraging McDonald’s, along with a handful of other fast food chains, to raise wages for their store workers, communicating with them via a letter signed by representatives. The stock has been trading sideways in the last couple of years and is currently surging higher. 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.

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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