On Oct. 6, American’s will no longer have to worry about getting to McDonald’s (MCD) before 10 a.m. if they want to get an Egg McMuffin or a sausage burrito from the famous golden arches, because MCD will soon offer all-day breakfast.
McDonald’s stock price has been hurting the last few years as a wave of fast-casual restaurants like Chipotle (CMG) have wrestled control of the industry away from the once-firm grip of Mickey D’s. The new chains’ offering of healthier, fresher food has turned customers away from the value proposition of fast food.
In the past, the idea of paying a dollar for a meal was a big deal, but in our current health-conscious society, a dollar for a burger makes consumers question the quality of the food … which is indeed questionable.
MCD Stock: Investors Are Not Lovin’ It
We can see how the value proposition has hurt McDonald’s over the last few years. On the sales side, MCD has experienced slowing revenue growth going back to 2011, when sales came in at $27 billion. In 2012, MCD posted sales of $27.6 billion, which climbed to $28.1 billion in 2013, only to fall to $27.4 billion a year later. MCD’s current full-year revenue estimate is just $25.03 billion, and earnings per share are also expected to come in lower than last year.
As for McDonald’s stock price, shares have risen 28% over the last five years compared to a 81% rise by the S&P 500. And over the last 24 months, MCD stock is up a mere 60 basis points to the broader market’s 18% gain. Year-to-date, however, McDonald’s is up a little more than a percent compare to a 6% loss for the S&P.
But, if we are to believe MCD management, they will have us all believe the all-day breakfast is a game changer. Mike Andres, president of McDonald’s U.S., compared the change to the implementation of the drive-thru window, and noted that customer traffic has increased in its test markets:
“We’re very excited — we think this could be the next big thing.”
First off: The next big thing, the drive-thru window … is this guy crazy? It’s breakfast food served during non-breakfast hours … the wheel hasn’t exactly been reinvented here.
Not to mention that there are already a number of companies offering all-day breakfast. The current issue for McDonald’s stock is that the fast-casual is hurting them with sandwiches and burgers. Now McDonald’s wants to take on more fast-casual restaurants by trying to move into the niche that Bob Evans (BOBE) or DineEquity’s (DIN) IHOP restaurants have carved out for themselves.
Investors should wait and see how this change translates throughout the U.S. market and over the longer-term. What MCD investors don’t want to see is customers simply changing their purchases from a burger to an Egg McMuffin. In order for McDonald’s stock to move higher, the all-day breakfast needs to bring in new customers to stores. If this indeed happens, than MCD stock will have a chance to rebound, rewarding shareholders.
In the meantime, MCD is likely to show some volatility. With this announcement, Wall Street analysts will likely be changing their revenue and earnings estimates for the next few quarters.
Those changes are going to move McDonald’s price in the short term. But, investors also need to remember that McDonald’s is planning on closing more than 700 locations this year, marking the first time in company history that more stores will be closed than opened. Those closings are going to cut revenue, making it even more difficult to determine what impact the all-day breakfast truly has on MCD’s bottom line.
Although MCD management is excited about peddling breakfast throughout the day, McDonald’s stock is not likely going to change long-term based on this move.
As of this writing, Matt Thalman had no positions in any company mentioned. Follow him on Twitter at @mthalman5513.
