McDonald’s has essentially been flat over the past 2.5 years, badly lagging a huge bull market in stocks. The stock has been hindered by tepid annual earnings growth of only 2-4%, and sales growth of about 2% as well. Nonetheless, the broader market’s strength led to a brief move to a minor new all-time high on May 14th that was quickly rejected, as seen on the weekly chart:
While MCD has been unable to get above the $103-$104 resistance area, the stock is still only 2% away from a breakout.
However, the fundamental indications don’t look stellar for MCD, especially given the weakness in consumer spending in the first half of 2014. Granted, the U.S. only accounts for about a third of MCD revenues, but it is expected to be the best region for global growth over the next year. On top of that, MCD has struggled to grow sales internationally for several years now.
Domestically, MCD’s target market of the lower end of the consumer spectrum continues to struggle much more than the high end. In the retail sector, companies appealing to the cost-conscious consumer have been hard hit in the last year, including former bull market leaders like TJX and ROST:
[caption id="attachment_42271" align="alignnone" width="600"]
TJX weekly chart, 50 week ma in pink, 200 week ma in yellow, Courtesy of Bloomberg[/caption]
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ROST weekly chart, 50 week ma in pink, 200 week ma in yellow, Courtesy of Bloomberg[/caption]
The relatively weak price action in both of these names over the past year is more evidence of tepid investor expectations for consumer spending growth in the U.S.
For MCD, the next earnings report is in late July. The stock has not advanced more than 1% on earnings since October 2011, which, surprise, surprise, is also around the time that the stock stalled out. Analysts have modeled in 5% earnings growth in 2014 and nearly 10% earnings growth in 2015, both of which look quite optimistic considering that the most recent quarter was a 4% contraction year-over-year.
In short, MCD seems set up to miss expectations unless a drastic turn occurs in consumer trends. On valuation, MCD is a 18x P/E stock with 5-10% expected earnings growth. If that growth does not materialize for the 3rd straight year, I expect that MCD likely sees some multiple contraction.
In any case, on a technical basis, I don’t want to put on a bearish bet in MCD with the stock only 2.5% from a breakout to new all-time highs, but we have our eye on this name in case the setup presents itself in the coming months.