Will McDonald’s Head Higher After Recent News?

With shares of McDonald’s (NYSE:MCD) trading around $93, 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 top priorities is boosting “coffee-driven visits,” according to a document laying out the company’s 2014 to 2016 U.S. strategy. In a January 28 memo, U.S. operations chief Jim Johannesen and U.S. brand chief Kevin Newell exhorted franchisees to deliver “a gold-standard cup of coffee with every visit.” Earlier this month, in a webcast for restaurant owners, McDonald’s vowed to become the “envy” of rivals and said Starbucks Corp. (NASDAQ:SBUX) was leading the “coffee wars.” McDonald’s is battling fast-food chains, coffee sellers, and even convenience stores hawking breakfast as cash-strapped Americans eat out less. Earlier this month, the world’s largest restaurant chain said U.S. same-store sales fell 1.4 percent in the fourth-quarter; profit barely budged.

T = Technicals on the Stock Chart Are Weak

McDonald’s stock has traded sideways in the last couple of years. The stock is currently trading near lows for the year and may need time to consolidate before heading higher. 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 rising key averages which signal neutral to bearish 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

14.22%

63%

60%

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

February Options

Steep

Average

March Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

2.03%

6.29%

4.55%

2.44%

Revenue Growth (Y-O-Y)

1.45%

2.39%

2.43%

0.90%

Earnings Reaction

0.46%

-0.64%

-2.68%

-1.95%

McDonald’s has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about McDonald’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

-3.82%

-11.80%

1.66%

2.64%

-1.87%

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 is counting on coffee to give sagging U.S. sales a jolt. The stock has been trading sideways in the last couple of years and may need time to consolidate. Over the last four quarters, earnings and revenues have been rising, which has left investors optimistic about recent earnings announcements. 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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