Does McDonald’s Have a Bright Future?

With shares of McDonald’s (NYSE:MCD) trading around $102, 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.

Over the next two days, the world’s biggest fast-food chain — which spends billions painting an image of smiles and fun — will be walking across a public relations minefield. On Wednesday, as many as 2,000 protesters from across the country will gather outside of McDonald’s headquarters in Oak Brook, Illinois, to call for worker wages of $15 an hour and the right to form a union without retaliation. On Thursday, those protests are expected to continue outside McDonald’s annual shareholder’s meeting. “This will be the largest labor protest that McDonald’s has ever faced,” says Kendall Fells, 34, the leader of Fast Food Forward, an activist group financed by the Service Employees International Union. “We know McDonald’s is preparing for us to come.”

The wage protesters promise to make themselves very visible to shareholders and McDonald’s executives, including CEO Don Thompson. The movement has picked up steam in recent months as part of the larger minimum-wage debate and even gained global media coverage last week with protests organized in about 30 countries as well as several dozen U.S. cities. McDonald’s actions — or inaction — over the next several days could be telling. “We respect everyone’s rights to peacefully protest,” says McDonald’s spokeswoman Heidi Barker Sa Shekhem, in an e-mail. “We are focused on welcoming our shareholders to McDonald’s annual meeting.” But some shareholders may be surprised by the welcome. Among the protesters planning to be there are about 140 McDonald’s workers from around the country, 500 other fast-food workers, up to 50 clergy and hundreds of community activists, says Fells. Some political figures also are expected to attend.

T = Technicals on the Stock Chart Are Mixed

McDonald’s stock has been moving higher over the last couple of months. However, the stock is currently pulling back and may need time to consolidate. 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 above its rising 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

15.09%

20%

18%

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

Put IV Skew

Call IV Skew

June Options

Flat

Average

July 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 small 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 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?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-3.97%

2.03%

6.29%

4.55%

Revenue Growth (Y-O-Y)

1.44%

1.45%

2.39%

2.43%

Earnings Reaction

-0.35%

0.46%

-0.64%

-2.68%

McDonald’s has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about McDonald’s recent earnings announcements.

P = Excellent 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

5.47%

-1.23%

11.68%

-5.68%

3.56%

McDonald’s has been a relative performance leader, 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. On Wednesday, as many as 2,000 protesters from across the country will gather outside of McDonald’s headquarters in Oak Brook, Illinois, those protests are expected to continue outside McDonald’s annual shareholder’s meeting on Thursday. The stock has been moving higher over the last couple of months, but is currently pulling back. Over the last four quarters, earnings and revenues have been rising. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, McDonald’s has been a year-to-date performance leader. Look for McDonald’s to OUTPERFORM.

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