Is McDonald’s Undervalued at Current Prices?

With shares of McDonald’s (NYSE:MCD) trading around $97, 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, the 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 country on the globe. As consumers continue to enjoy the McDonald’s products, look for it to see rising profits.

The fast food behemoth said in an email to CNBC that it is currently testing a mobile payment application at its Salt Lake City and Austin stores. It is normal practice for restaurants to test new ideas in select markets prior to deciding whether to expand an item or service at the nationwide level. McDonald’s already has a nationwide app in place that provides a restaurant locator, nutritional facts, and career information.

Spokeswoman Ofelia Casillas said in the email that, “We’re always looking at new technologies to make the McDonald’s experience better for our customers. We are testing some of these technologies in a few markets, so it’s premature to speculate on the decisions we may make after the tests, but we’re excited to bring a cutting-edge experience in the future to our customers.”

T = Technicals on the Stock Chart Are Mixed

McDonald’s stock been rising over the last few years. However, the stock has currently been pulling back a bit as investors have been booking gains. 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 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

13.82%

0%

0%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November 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 very 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 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

4.55%

2.44%

3.83%

-1.38%

Revenue Growth (Y-O-Y)

2.43%

0.90%

1.90%

-0.19%

Earnings Reaction

-2.68%

-1.95%

0.57%

-4.45%

McDonald’s has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have expected a little more from McDonald’s’s recent earnings announcements.

P = Average 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

10.32%

9.11%

22.93%

82.55%

15.39%

McDonald’s has been an average 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. The company continues to adopt new technologies in order to enhance their customer experience. The stock has been rising in recent years but is now pulling back a bit as investors book gains. Over the last four quarters, earnings and revenues have been on the rise, however, investors have expected a little more from the company. Relative to its peers and sector, McDonald’s has been an average year-to-date performer. WAIT AND SEE what McDonald’s does this quarter.

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