McDonald’s (MCD) can’t pull out of a sales tailspin that’s hobbling MCD stock, and yet — almost unbelievably — shares are still too expensive to buy.
MCD stock is a punk over a number of time frames and the current valuation sets it up for more underperformance in the future. MCD stock is off 6% for the year-to-date, lagging the S&P 500 by 10 percentage points. The 52-week chart is even worse, as MCD stock had a loss of more than 3% while the broader market gained 10%. Heck, MCD stock is negative over the last three years, as well, and trails the S&P 500 by a wide margin in the five-year chart.
And yet MCD gets the benefit of the doubt that it will be able to solve its popularity problems. That’s the only explanation for MCD stock going for nearly 16 times forward earnings with a long-term growth rate of less than 6%. Indeed, the broader market — which isn’t exactly a bargain — has a more compelling valuation than MCD stock.
If the latest quarterly results don’t beat down MCD stock enough to make it a buy, it’s not clear what will. Between macroeconomic weakness and changing tastes, MCD is facing its greatest challenge since the Atkins craze of a decade ago.
As we’ve noted before, a chunk of MCD’s bedrock customers are avoiding the golden arches because of stagnant wages and job insecurity. Compounding that problem is rising competition from Chipotle Mexican Grill (CMG) and other chains offering fresher, healthier menus.
True, the latest meat scandal in China hurt results, but that will pass. What McDonald’s can do to become popular again is much more in doubt, and McDonald’s needs to figure it out fast if it’s to reverse the ugly sales trend in third-quarter earnings.
MCD Stock Slumps on Sales Weakness
Revenue dropped almost 6% to $6.99 billion. Analysts were targeting revenue of $7.18 billion, according to a survey by Thomson Reuters. In addition to missing estimates on the top line, same-store sales came up short.
Global same-store sales fell 3.3% in the quarter, worse than analysts’ forecast for a decline of 3%. Furthermore, the drop in same-store sales — a key measure of the chain’s health — were widespread.
In the U.S., which is MCD’s largest market, same-store sales dropped 3.3% against a forecast of 3%. In Europe, which is flirting with recession once again, same-store sales fell 1.4% vs. an estimate of 0.3%. The Asia Pacific, the Middle East and Africa region saw same-store sale drop by 9.9%, led by China, but at least that topped estimates.
Weak revenue caused MCD to post a 30% drop in quarterly net income, to $1.07 billion, or $1.09 per share, from $1.52 billion, or $1.52 per share a year ago.
The bottom line is that even on an adjusted basis, MCD earnings missed Street estimates by a wide margin. Analysts were looking for earnings per share of $1.37.
McDonald’s CEO says the world’s largest restaurant chain can reverse the slide with better customer service and marketing, improving its value proposition and simplifying the menu, but admits there will be no quick fix. September same-store sales slumped once again after recording their biggest decline in 10 years at summer’s end, and October same-store sales are forecast to be weak too.
At some point, MCD stock is a buy, but it needs some multiple compression first. The good news is that MCD isn’t suffering from a secular change in attitudes and tastes like Coca-Cola (KO) is. After all, the competition is growing and stealing market share.
That suggests that MCD can fix its problems, but it’s given no reason to see that happening soon. In the meantime, MCD stock has farther to fall before it’s worth buying.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.