McDonald’s Corporation (NYSE:MCD) posted its first monthly gain in U.S. same-store sales in a year and beat Wall Street’s quarterly profit estimate, but McDonald’s still ended a terrible year with more earnings and sales declines.
MCD stock has been range-bound for three years now, and if it can’t break out of that pattern this year, it’s going to be very hard to justify McDonald’s as a hold any longer.
On the one hand, it’s tough to give up on blue-chip like MCD stock when it’s been a such a huge market-beater over the long term. The market was all set to write off MCD more than a decade ago when shares were bouncing around $15. Like today, there was ample reason to conclude that the world had passed McDonald’s by, that tastes had irrevocably changed and that MCD had no growth left.
But MCD went on to effect a successful turnaround and become an outstanding holding. From the start of 2003 to the end of 2011, MCD gained nearly 500%. The S&P 500 rose just 40% over the same span.
Nobody wants to make that mistake with MCD stock again, which helps explain its remarkable resilience amid a long stream of very poor results. MCD sales are in a long-term slump, especially in the all-important U.S. market, and yet MCD stock is off just 4% over the last 52 weeks.
MCD Faces More Competition Than Ever
The weak labor backdrop isn’t helping McDonald’s, but even worse is what looks to be an existential threat to its business. Wendys Co (NASDAQ:WEN) and Burger King Worldwide Inc (NYSE:BKW) have become more competitive at the same time that chains such as Chipotle Mexican Grill, Inc. (NYSE:CMG), Five Guys Enterprises, LLC and Chick-fil-A, Inc. have gained in popularity.
MCD stock bulls no doubt hope we can look back on 2014 as the nadir of McDonald’s multi-year woes, but it’s going to be tough to pull out of this hole. The only good news in the MCD earnings report was that McDonald’s managed to trip over some very low bars.
McDonald’s global same-store sales — a key measure of a retailer’s health — fell 0.9% in the most recent quarter, which was better than the 1.5% drop analysts were predicting. So, yes, better than expectations, but still a decline.
In the U.S., monthly same-store sales rose 0.4%, which beat estimates and was the first gain in that metric in at least a year. (Never mind that 0.4% of anything sounds more like a rounding error than a victory.)
Oh, and earnings per share — on an adjusted basis — beat Street forecasts by a penny.
That was the extend of good news in the MCD earnings report, in which net income fell 21% and revenue dropped 7.3%.
MCD is working feverishly and on a number of fronts to get sales and traffic back, but by its own admission, the turnaround won’t happen anytime soon. Indeed, MCD warned that January sales were set to decline and results for the first half of 2015 would be pressured.
As MCD CEO Don Thompson said in a news release, “Our business continues to face meaningful headwinds.” That’s never a reassuring thing to hear.
Tactical investors can forget about MCD. It has no catalysts to go anywhere fast. Given the market’s remarkable patience, MCD stock looks like it can trade sideways for a long time.
As much as the resilience makes it easy to hold onto MCD waiting for a turnaround, there is a serious opportunity cost associated with standing pat.
If MCD can’t get things turned around by the end of 2015, then this hold will become a sell.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
