McDonald’s Corporation (MCD) has been stuck in a rut since late 2011, with MCD stock mostly rangebound between $90 and $100 per share. Meanwhile, the S&P 500 has risen roughly 70% in the same period.
Everyone knows why MCD has been in such a bad place; McDonald’s earnings have been weak and sales have flatlined even as “fast casual” chains including Panera (PNRA) and Chipotle (CMG) have been on the rise.
But that’s theoretically all old news. In January, MCD stock saw a big change at the top with CEO Don Thompson stepping down. Then, in August, McDonald’s announced store closures that would reduce its restaurant count for the first time in 40 years.
And, of course, breakfast is now all-day at McDonald’s restaurants.
Those were hard decisions, but the YTD performance of MCD stock has been pretty good in part because of optimism over these changes; McDonald’s stock is up 11% since January vs. a down market.
Of course, optimism is all well and good … but the proof of improvement will have to manifest in financials soon. And the upcoming McDonald’s earnings report is as good a time as any to prove that the company is back, given big strength in shares over the last 30 days.
But will McDonald’s earnings deliver the right numbers?
MCD Stock — Don’t Bank on a McDonald’s Earnings Win
Investors should know by now it’s not as simple as just waving a shiny new grill spatula around and calling yourself a different restaurant. MCD stock holders have heard overtures of changes before, and franchisees continue to be very upset with what they see as a corporate culture out of step with the basics of the business.
So why should McDonald’s earnings be any different this time around?
Keep in mind that MCD stock has missed expectations in three of the last four quarterly reports. And while the addition of all-day breakfast could provide a short-term pop for sales based on novelty alone, a roughly 7% rise in the past 30 days based on optimism about this strategy pretty much indicates the success is now baked in to MCD stock.
Besides, it’s important to acknowledge that while breakfast is a big driver of sales — some 25% of revenue — it’s not like a full menu is being rolled out across the day, just a limited menu to keep kitchens running as efficiently as possible.
But therein lies the biggest beef of franchisees and the biggest problem for the McDonald’s brand.
A company that once had a very simple menu and a clear focus on burgers and fries is now trying to do everything from breakfast to specialty beverages to premium chicken sandwiches.
Customers don’t view any of this as particularly high quality, and MCD stock has struggled to connect, given the premium options of other burger joints and plenty of quality stuff out there from the likes of Chipotle et al that has the veneer of fresh and healthy eating … even if the calorie counts are ultimately not much better.
Thus, it’s difficult to imagine that anything about the fundamentals of the business has changed, and we can expect pretty much more of the same from McDonald’s earnings this time around.
And if sales are down yet again in the U.S. for Q3? Well, investors may start cashing out of MCD just as quickly as they’ve been loading up in the last few months.
Is There Long-Term Hope for MCD Stock?
All that said, a strong balance sheet with huge free cash flow means big dividends and buybacks. The 3.3% yield for MCD stock is admittedly pretty attractive here, and a plan to pay dividends and buy back stock in an effort to return $20 billion to shareholders through 2016 will continue to satisfy many buy-and-holders.
It’s also important to note that a huge corporation like McDonald’s doesn’t change quickly. So even if U.S. sales are still declining, a marked improvement in that rate of decline could be seen as a sign that the company is at last on the right track.
Consumer tastes are notoriously difficult to predict, and it’s unlikely that MCD can pivot away from its legacy brand in the near term. However, it’s undeniable that McDonald’s is a global restaurant powerhouse and isn’t going anywhere. There may be appeal for some long-term investors regardless of the near-term pain.
All that said … I’m not a buyer here given the forward P/E of about 20 and a history of underperformance for the last few years. There may be potential for a buy here before a leg higher, but with stocks like MCD, it is often much safer to let them prove they’ve changed rather than give the benefit of the doubt.
We’ll see in cold, hard facts whether MCD stock has its act together in the upcoming earnings report. But I wouldn’t hold your breath.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
