UPDATE 3/21/16: When I wrote this up on Friday I forgot to consider the fact that MCD shares go ex-dividend on May 27th, 2016, and if one was considering this sort of stock alternative strategy you may want to avoid the hassle of early exercise on in the money June calls and use May expiration instead that would catch their upcoming Q1 earnings event and also define one’s risk. More on dividend capture strategies here.
In 2o15, only about a third of McDonald’s sales came from the United States. Despite the fairly consistent trading range over the U.S. Dollar Index (DXY) during that time period between $94 and $100, I think it is safe to say that the recent 3.5% decline in the DXY since the start of March has become in a tailwind in investors minds for large U.S. multi-nationals like MCD.
To give you a sense of the drag on earnings and sales had on MCD in 2015, from Zacks:
Earnings were $4.80 per share; down 0.4% from 2014. However, earnings increased 10% in constant currencies.
Revenues were $25.41 billion, down 7% year over year. Excluding currency translation revenues increased 3% in 2015.
Shares of MCD are up 4.5% year to date, most of those gains coming since the start of the month, that happen to coincide with the 3.5% drop in the DXY:
Just because the Dow Jones Industrial Average and the S&P 500 are back up on the year, it does not exactly mean that it’s all clear. One take-away from the Federal Reserve’s message this week is that their more dovish stance on rate increases has to do with their lack of visibility about the health of the global economy. Yet their April 27th meeting remains a LIVE meeting. If for any reason markets started to anticipate an April raise, the dollar would rally, and stocks like MCD could give back some of their recent gains.
Also if MCD were to see any reversal in positive comp trends when they report Q1 on April 22nd, investors might look to re-rate the stock which trades 23x 2016 earnings that consensus suggests is growing at 8%, probably 10% with the dollar where it is right now. Analysts expect sales to decline 5% this year, which would be its 4th consecutive annual sales decline to about $24 billion, or about 15% below its peak in 2013.
A quick look at the one year chart shows the fairly epic breakout in October from $105 to its Jan highs of of $125:
The stock is now back with a percent of the all time highs after the recent bounce, with obvious technical support in the mid teens. There is absolutely nothing wrong with this chart, but with options prices so low, it could make sense for new longs to consider in the money calls in place of stock, or those who have gains and thinking of reducing exposure. Thirty day at the money implied volatility is just above 15%, very near levels that vol spiked on two occasions in the last year:
Stock alternatives look interesting in MCD given its relationship to the USD move, the recent bounce in the broad market, positive sentiment surrounding improved US comps resulting from all day breakfast, high valuation and low options places.
One trade I might consider as an alternative would be Long June 120 call for $6 (stock reference $123.50). These calls break-even at $126, up 2% from current levels, above the prior highs, but importantly, they are 3% in the money. Long these calls instead of buying the stock at current levels is like being long with a 5% stop to the downside. And it’s very similar to the stock you would replace if you are interested in staying long the stock but defining your risk to the downside after such a big run.