Can McDonald’s Continue to Surge Higher?

With shares of McDonald’s (NYSE:MCD) trading around $95, 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.

When a photo of what was supposed to be mechanically separated chicken, or “pink goop,” went viral and quickly became associated with McDonald’s Chicken McNuggets, many people thought the chain was doomed. The picture of the goop, which looks similar to unsavory strawberry soft service ice cream, certainly does not resemble anything close to chicken meat, and some feared that it would be the straw that broke the camel’s back for McDonald’s.  There have long been rumors that McDonald’s manufacturing process is something its customers never want to know about, and that picture almost all but confirmed it. Time reports that in response to the photo featuring the “pink goop,” McDonald’s Canada released a video on its website that gives customers a behind-the-scenes look at how McNuggets are really made.

T = Technicals on the Stock Chart Are Mixed

McDonald’s stock has traded sideways in the last couple of years. The stock is currently surging higher and looks poised 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 signals 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

14.18%

50%

48%

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

March Options

Average

Average

April Options

Average

Average

As of Friday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant 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 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%

0.9%

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 pleased with 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), and Wendy’s (NASDAQ:WEN) — and sector?

McDonald’s

Yum Brands

Burger King

Wendy’s

Sector

Year-to-Date Return

-1.30%

-5.11%

7.66%

3.56%

3.4%

McDonald’s has been an average performer, year to date.

Conclusion

McDonald’s is a well-recognized company that fulfills cravings and demand for quick food choices that many consumers across the globe enjoy. When a photo of what was supposed to be mechanically separated chicken, or “pink goop,” went viral many people thought the chain was doomed. The stock has been trading sideways in the last couple of years but is currently surging higher. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased 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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