McDonald Stock Investors too Optimistic
Companies / Corporate Earnings Aug 19, 2015 - 04:56 PM GMTBy: AnyOption
There are some stocks on the market that investors just love to hate. No matter what these stocks do, it seems as if it’s never enough. And then there are the stocks that investors just can’t bring themselves to hate, regardless of all of the reasons why they probably should. McDonald’s is one of those stocks.
In spite of the company experiencing an unprecedented downturn over the last two years, McDonald’s shares are actually up 5.51% over that time. Shares recently topped $101, pushing to a 13-month high with analysts expecting the company to finally start making a turnaround in terms of comp sales, where it has more than struggled recently.
Why the praise?
For the first time in more than 40 years, McDonald’s is closing more stores in the United States than it is opening new ones. While this may seem like a bad sign, it’s actually a good one. The fast-food giant has foundered in the United States, its biggest market, turning in declining sales comps almost every month since October 2013. The choice to drop some of its less profitable locations is a good step for the company. Investors have also noted that McDonald’s is opening 300 restaurants globally in areas where growth prospects are higher.
"In the U.S., we will have a net reduction in restaurants, but the impact is minimal in comparison to the 14,000 restaurants we operate across the country, which serve 27 million customers per day," McDonald's spokeswoman Becca Harry said in a statement. "We consistently review our restaurant portfolio and make strategic decisions to better position our business for the future."
McDonald’s is also toying with the idea of offering breakfast all day at all its restaurants. The company began testing it in April, and according to Fortune, is looking to roll out the option nationwide. It’s a good thing too, because a recent survey by YouGuv BrandIndex, a brand perception service, says that 41% of people who eat breakfast twice a day choose McDonald’s for their second meal. Compare that with Subway (34%), IHOP (32%), Burger King (27%) and Starbucks (26%). With McDonald’s long winning the breakfast battle, it’s a surprise the company hasn’t considered offering it all day until recently.
The company has also made some minor branding changes. For example, it recently announced its quarter pounder would increase the size of its Quarter Pounder from 4 oz. to 4.25 oz. Months ago, it announced a new antibiotics policy on its chicken products.
And, of course, let’s not forget the company’s famed dividend yield of 3.4%, which has likely been the single-biggest reason investors didn’t ditched the stock entirely in its weakest moments.
Why investors should be wary
As much as McDonald’s is doing, investors should realize that this is going to take a long time. Revenue was down 9.6% in its recent quarterly report, and global comp sales fell 0.7% on negative traffic in the U.S. and APMEA (Asia/Pacific, Middle East and Africa). While the company is forecasting to tip positive for global comps during Q3, it’s not enough to justify an almost all-time high in its share price. APMEA is especially a concern, with comps down 4.5%. With last year’s food scandals in China and Japan still putting downward pressure on revenue, we’re not going to see the hyper growth we were seeing before the scandals for a long time yet.
McDonald’s also isn’t solving the problem that many people are saying caused the negative traffic in their biggest market (U.S.) in the first place: low-quality food. With competitors like Chipotle, Shake Shack and Five Guys offering a better food experience, often with much better ingredients not filled with preservatives and processed junk, McDonald’s still faces an uphill battle as these other restaurants become more popular with Millennials.
Will McDonald’s fold? No. Even with contraction, the company has a niche that works well. But we’re just at the beginning of the so-called turnaround and we have yet to see significant progress. Let’s give it a little time before we get too excited.
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