$MCD Q4 Earnings Cheat Sheet

by Enis January 22, 2014 12:41 pm • Commentary

Event:  MCD reports its Q4 earnings tomorrow before the open.  The options market is implying about a 2% one day move, which is slightly above the 4 qtr avg of about 1.5% but in line with he 8 qtr avg of about 2%.  

Sentiment:  Wall Street analysts are generally positive on the stock, with 14 buys, 19 holds, and no sells, and a 12 month price target of around $104.  MCD is actually one of the few S&P 500 stocks that is lower than it was 2 years ago.  Analysts have remained relatively optimistic in the face of that weak performance.  Short interest is negligible at 1.3% of the float.

Options Open Interest:   Total open interest is slightly skewed towards calls vs. puts, by a ratio of about 1.2 to 1.  The past month of options activity has been similarly skewed towards calls (by a ratio of 1.1 to 1).  Here are the lines with over 5k of open interest:

-Weekly 95 puts

-Feb22nd 95 puts

-Feb22nd 97.5 calls

-March 90 puts

-March 97.5 calls

-March 100 calls

-Jan15 95 calls

-Jan15 110 calls

Price Action / Technicals:  MCD has been in a short-term downtrend for more than 6 months now, making a series of lower lows and lower highs, indicated by the red trendline.  However, the stock has been able to hold the $93-$94 support area indicated in green, which was resistance a few times in 2012, and acted as support in 2013:

MCD daily chart, 200 day ma in yellow, Courtesy of Bloomberg
MCD daily chart, 200 day ma in yellow, Courtesy of Bloomberg

The 200 day moving average has actually turned lower now too, and could act as short-term resistance, now around $97.75.

Volatility:  MCD implied volatility has historically been closely correlated to SPX index volatility, and the past couple years are no exception.  With the VIX around 13, MCD implied volatility is also near 2 year lows, even with this week’s earnings event:

30 day implied volatility in MCD, Courtesy of LiveVolPro
30 day implied volatility in MCD, Courtesy of LiveVolPro

30 day implied volatility in MCD was last above 20 in June of 2012, which is also the last time the VIX registered a reading above 25.  Only a break of important support in the $93-$94 could likely send MCD implied volatility into the high teens.

Our View:  We have not been fans of MCD stock for many months now.  While the Wall Street community is generally positive because of a “cheap” valuation, we actually think the last 2 years of results are an indication of a business that is no longer growing.  In fact, based on McDonald’s difficulties with its vast franchisee network, as MCD management tries to squeeze more money out of them by increasing the fees to be a franchisee, we think management is being forced into more and more short-term thinking situations at the cost of long-term profits.

Earnings and sales have only grown 2-3% in 2012 and 2013.  Analysts are projecting an increase in earnings of 8% over the next 2 years, which seems quite a stretch given the company’s recent troubles.  Competition has increased globally, and MCD has shown little strategic initiative.

At 17x earnings, even 8% earnings growth doesn’t seem great.  But another year of nearly flat growth, and we think MCD’s multiple might be headed 10-20% lower in 2014.  We don’t want to press MCD near 1 year lows, but we do think the odds are against MCD in the coming year.