McDonald’s: Better Days Ahead?

Does McDonald’s still have a future or is the concept too old fashioned in this new modern world?

With comp sales down 2.2% in the U.S. in May, the domestic sluggishness has continued.  The fast food category has become less in favor in recent times as consumers have become more attracted to the fast casual segment, and seemingly healthier options such as Chipotle Mexican Grill (NYSE:CMG) and other newer concepts.  While McDonald’s has been around for 75 years, and has over 36,000 restaurants, it seems that newer and fresher concepts are the ones doing well these days. Are these just a fad and the Golden Arches will maintain their staying power, or are its best days behind it?  We think that while MCD will not suddenly turn into a growth stock, there is reason for some optimism at McDonald’s, and that especially in a weaker market, the stock may have promise.  Here are some reasons why:

• After underperforming for the past 5 years, there are not high expectations for the stock. Interestingly, the first half of the last 5 years the stock matched the S&P as both rose 27%.  However, the past two and a half years has seen the S&P rise an additional 49% while MCD has only risen 7.5%.

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2. Down 14% YTD, What Lies Ahead For McDonald’s Stock Following Q2 Earnings?
3. Down 12% This Year, What’s Happening With McDonald’s Stock?
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6. After A 14% Top-Line Growth In Q2 Will McDonald’s Stock Deliver Another Strong Quarter?

• With revenues of $25 billion and a market cap of $91 billion, the stock sells at 3.6 x revenues.  Competitor Restaurant Brands International Inc (NYSE:QSR), the parent company of Burger King and Tim Hortons, sells at 4.3 x revenues.  Getting the same valuation would imply almost a 20% increase in MCD’s stock.  On earnings, MCD sells at 18.3 x next year’s number, while QSR sells at almost double that, at 33 x earnings.  Is Burger King worth almost twice the valuation as McDonald’s?  Or perhaps the real question is: is MCD worth only half the valuation of QSR?

• The new plan to “fix” the company, and putting some distance from the bad meat scares in Asian markets, may slowly start to get things back to normal in that region.
• They have not had a hot new product in a while and if they develop one, that would be a positive.
• Bottom line: low expectations, bad recent past performance, combined with new management, and new plans to right the ship and improve customer traffic, could lead to better times ahead for McDonald’s.

While competition from the new Burger King, the stronger dollar overseas hurting international sales, and the continued stagnant U.S. sales, have all depressed things currently, there may be a light at the end of the tunnel as most of these negatives are known and reflected in the stock price. Perhaps the possibility of something going right, is the surprise no one is looking for?

What do you think?  We like to hear from our readers and try to raise issues that might move a stock, but we are always interested in learning what you think the key issues are in a situation.  Let us know what you think.

See the links below for more information:

• McDonald’s reports global comparable sales for May (McDonald’s Investor Relations)
• McDonald’s announces initial steps in turnaround plan (McDonald’s Investor Relations)
• McDonald’s Q1 earnings: Slower recovery efforts in Japan hurts comparable sales (www.trefis.com)
• Restaurant Brands International, Reuters consensus (www.reuters.com)
• McDonald’s, Reuters consensus (www.reuters.com)
• Trefis analysis:  McDonald’s | Restaurant Brands International

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