Where Will McDonald’s Go Next?

With shares of McDonald’s (NYSE:MCD) trading around $98, 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.

Starting today, McDonald’s will be giving away free small cups of coffee through April 13. Now, the question on many analysts’ minds is: Why? This is the first time the chain has ever hosted a free coffee “event,” and some suspect CEO Don Thompson is throwing out the freebies in order to keep his customers away from Taco Bell’s (NYSE:YUM) new breakfast menu; others say this is McDonald’s preparation for testing its McCafé coffee at retail. Burger Business reports that the Oak Brook, Illinois-based company typically hands out free coffee on National Coffee Day, September 28, but other than that, it has always charged its customers for the caffeine. Considering McDonald’s is the world’s largest fast food chain, there was never a real need to give away its food or drinks for free if customers would gladly pay money for them. Since the chain is all of a sudden willing to give out coffee handouts for two whole weeks, it has some suspicious consumers, analysts, and investors on its hands.

It’s no doubt a good strategy, as the freebies are expected to boost traffic in stores, but the impetus behind the move is still in question. One popular hypothesis published by USA Today on Saturday is that McDonald’s is simply trying to get an edge on its new competition from Taco Bell as the latter launches into the $50 billion fast food breakfast market. As of Friday, Taco Bell now has a new breakfast menu, and unlike McDonald’s conventional breakfast sandwiches and hash browns, it includes items like Waffle Tacos and sugary Cinnabon Delights.

T = Technicals on the Stock Chart Are Strong

McDonald’s stock has been trading sideways over the last couple of quarters. However, 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 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

13.89%

76%

74%

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

April Options

Flat

Average

May 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 significant 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?

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 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

1.17%

-0.49%

15.79%

4.13%

6.15%

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. Starting today, the company will be giving away free small cups of coffee through April 13. The stock has been trading sideways over the last couple of quarters, but is currently surging higher. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased. Relative to its peers and sector, McDonald’s has been an average year-to-date performer. Look for McDonald’s to OUTPERFORM.

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