MCD Stock Looks Tempting, But Ultimately Just Empty Calories

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Anyone coming to one of the 14,200 or so McDonald’s (MCD) locations between September 16 to September 29 during breakfast hours can help themselves to a free coffee. Though diners will surely appreciate the company’s magnanimous gesture, investors aren’t going to be so happy.

mcd stock, mcdonald's stockThis is the second time this year that the restaurant chain has given away free coffee. But the promotion didn’t do much to lift the company’s lackluster same-store sales then, and there’s no reason to expect this to be more successful now. Indeed, sales at existing U.S. McDonald’s locations fell 3.7% in August, the worst decline in more than a decade and the fourth consecutive quarter of falling same-store sales.

Shares of MCD stock have slumped 3.6% this year, underperforming the S&P 500 by about 11 percentage points. Rivals Burger King (BKW) and Jack in the Box  (JACK) both outperformed the market by a wide margin during that time. Nonetheless, MCD stock is tempting right now.

MCD stock’s forward price-to-earnings multiple has fallen to 16 — far cheaper than BKW’s 27 and JACK’s 23. MCD stock has a dividend yield of 3.5% — better than the 2.6% yield on the 10-year Treasury Bond and well ahead of the average yield of the S&P 500, which is 1.9%.

MCD stock, however, is on a road to nowhere. Analysts have an average 52-week price target on MCD stock of $98.93, about a 6% increase over where it currently trades. Shares are going to tread water for a while. MCD stock is a decent dividend play, but I don’t think there is any sense of urgency for investors to buy the stock now. The company’s dividend is about as safe as you can get, but given the flattish revenue there are better options for most investors especially given the subpar efforts MCD’s management team.

Indeed, under CEO Don Thompson, McDonald’s has tried almost everything under the sun to get consumers into its stores, and nothing has seemed to work.

What’s Hurting MCD Stock

Earlier this year, Mighty Wings were such a huge disaster that the chain was forced to slash their prices to the bone — pun intended — to move them before discontinuing their sale. Who can forget the Angus Third Pounder and expensive burger with dismal sales that was pulled from the menu? In fact, MCD shareholders haven’t had a “hit” since 2001 when Thompson’s predecessor, Jim Skinner, introduced the McCafe in the U.S.

During the company’s earnings conference call in July, Thompson warned investors that he didn’t think the company’s fortunes would improve significantly in the second half of the year. He claims to have a few more tricks up his sleeve to bolster the company’s sales, though he didn’t offer any specifics.

“We’ve often said that there is no one silver bullet or single solution for driving sustained growth,” he said, later adding, “We’re moving with a sense of urgency but recognize that it will take time to see the results of our actions.”

Time, though, isn’t on Thompson’s side.

Newer offerings such as three additional Quarter Pounder with Cheese flavors and the Premium Chicken McWrap sandwiches haven’t excited diners much. The chain’s new Japlapeno Double, which is being tested as a limited-time offer, has gotten some decent reviews on sites such as Brand Eating, but few consumers are probably going to try it.

McDonald’s has a huge problem with Millennials, who prefer healthier fare at rivals such as Chipotle (CMG) or burgers at chains such as Five Guys. According to media reports, MCD is planning a “build your own burger experiment” in Southern California.  If this sounds familiar to readers of a certain age, that’s because Burger King has been telling people since the 1970s that “special orders don’t upset us.”

McDonald’s, which also is struggling with food safety issues in China and lackluster demand in other parts of the world has created a brand that emphasizes price over taste. When times are tough, this message appeals to cash-strapped consumers who want to eat out. However, when an economy begins to rebound, consumers develop a more discerning palate.

Market research firm Techmonic has found that the percentage of consumers aged 19 to 21 who visited McDonald’s monthly has plunged by 13 percentage points, while the visits of people aged 22 to 37 remained flat. A recent Consumer Reports survey ranked McDonald’s dead last among burger chains.

Wall Street is finding MCD stock as hard to swallow as its food, and that situation won’t change any time soon.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/mcd-stock-mcdonalds-sell/.

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