Does McDonald’s Have a Bright Future?

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.

McDonald’s desperately needs some McLovin’ in Japan. McDonald’s Holdings Co. Japan Ltd. released its full-year profit outlook on Thursday, and according to Bloomberg, said that it is cutting its profit forecast by more than half. Japan is McDonald’s second largest market, behind the United States, but the fast food chain now only expects a net income of 5 billion yen ($48 million) in the country, reflecting a 57 percent cut from its previous full-year forecast. Analysts expected McDonald’s Japan to report a net income of 9.53 billion yen from the 3,170 stores it operated in the country as of the end of October. According to Bloomberg, McDonald’s Japan said, “The number of customers during the first quarter was well below the company’s expectations,” attributing the poorer-than-expected full-year forecast to everything from investment costs to slow customer traffic to costs on store closures.

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 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 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

14.08%

76%

73%

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

Put IV Skew

Call IV Skew

January Options

Steep

Average

February 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 very 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’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 had conflicting feelings about 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

8.11%

9.04%

31.02%

79.36%

17.05%

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. The company’s Holdings Co. Japan Ltd. released its full-year profit outlook on Thursday, and according to Bloomberg, said that it is cutting its profit forecast by more than half. 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. However, investors have had conflicting feelings about 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.

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