Last night on CNBC’s Fast Money my co-panelist Tim Seymour and I had a discussion on the merits of owning McDonald’s (MCD) at these levels (which he does). Tim feels the stock is defensive, I suspect for the following reasons:
1. Capital Return: last year company announced a $20 billion cash return, including share buybacks, and a dividend increase that now yields of 3.4%
2. New Management motivated to fix poor performance: Two weeks ago CEO laid out a “Turnaround Plan” for the company’s multi-year earnings and sales declines.
Watch our discussion after what I feel was absolute noise of the headwind of rising minimum wage at 1 minute in:
While it is hard to argue that the motivations of a new CEO charged with turning around a lagging business, my sense is that the ground has been and will continue to move quickly below MCD’s feet, and all the financial engineering in the world will not halt the trend away from fast food chains that offer unhealthy and poor quality foods. It would be one thing if it were just in North America, but aside from Europe’s 1% gain in same store sales in April every other region showed declines, with the U.S. down 2.3% and Asia/Middle East/Africa down 3.8%.
It is my view that here in the U.S. the company is clearly on the wrong side of a massive secular shift away from MCD’s offering, and while they have been moving quickly to simplify their menu and offer healthier options, it might not have been fast enough as they have lost the first battle of a raging PR war, and upstarts like Shake Shack are gaining mind share with the public.
So on a near term basis, MCD’s stock seems to have found a bit of support from a sentiment standpoint. As Tim noted in the video clip much of the negative news may be IN the stock, as they are known. I guess from where I sit there is one massive unknown, if and when the multi-year sales declines end. The company can cut costs, buyback stock and manage earnings, but can they keep pace with what could be a greater than expected sales decline in the next year or so? MCD’s sales are expected to be about $25 billion this year, down $3 billion from their 2013 peak of $28 billion with this year’s expected decline the lion-share. Consensus is calling for only a 3% decline in 2016, I suspect this could be low and if the company is not able to restructure in a way to cut costs in line with sales declines, the dollar continues to hurt sales overseas where they get 70% of their sales, then the stock trading at 21x expected earnings (consensus calling for a 2% decline in 2015 and a whipping 10% increase in 2016) could be viewed as expensive.
From a technical standpoint, it wouldn’t take much progress on any of their new initiatives to have the stock test the prior all time highs just below $105, but I suspect it will take some big news, possibly combination of activist agitation (rumored) and a halt in same store sales declines to have the stock breakout to new all time highs.
We will be continuing this debate on The Ticker District throughout the day, so please check it out.