Since becoming CEO of McDonald’s Corporation (NYSE:MCD) a year and a half ago, Steve Easterbrook has had the company on a roll.
MCD stock is up about by about one-third and it has delivered $4.37 per share in dividends. You could have gotten all this for under $95 per share if you believed in the Brit, but even now you can get a 2.9% yield and a stock most analysts call what they call a lot of the company’s customers:
Overweight.
Easterbrook mainly did all this with one weird trick. He told his franchises to sell their breakfast items all day. Pancakes, all day. Eggs, all day. Breakfast sandwiches, all day. It was brilliant. Breakfast items are hugely profitable, eggs cost less than cows. And it supports the sale of McCafe coffee drinks.
The question is, what does Easterbrook do for an encore?
Thanks in part to the highly publicized problems of Chipotle Mexican Grill, Inc. (NYSE:CMG), a McDonald’s spinoff, and E. coli contamination, Easterbrook has brought the rest of the fast food complex with him. Fast food sales were up 2.7% in the first quarter, against a 0.3% gain at fast casual chains like Chipotle and Panera Bread Co (NASDAQ:PNRA).
All this has analysts pounding the table for investors to buy the fast-food stocks, especially McDonald’s. Does this make sense?
Should You Buy MCD Stock?
Right now you’re paying a multiple of 23.5 for McDonald’s earnings. The company actually had lower sales in 2015 ($25.4 billion) than it did in 2014 ($27.4 billion). You should offset this a bit with another recent Easterbrook move, re-franchising over 4,000 company-owned stores.
The result of this is lower gross sales, but higher net income relative to sales, since the franchiser is selling food and marketing services for resale, not delivering burgers into the hands of customers. I also like his long-overdue move into China, where the company plans to open up to 1,000 restaurants, making that its second-largest market. It will be doing this through financial partners as well, essentially a franchise deal. Again, small boosts to the top line, bigger boosts to the bottom line.
Against this backdrop of franchising, it’s almost hard to believe that MCD continues to face a revolt from its older franchisees. The small entrepreneurs Ray Kroc built his business on see all-day breakfast as a hassle, and they want out. Easterbrook is building a new franchise model, more like what The Coca-Cola Co (NYSE:KO) has with its bottlers, of corporate owners under the corporate umbrella, the day-to-day problems of operations pushed down to employees rather than store owners.
For this reason, I’m not loving MCD stock at the moment.
Easterbrook has benefited from trends he did not make, including a fear of “real” food as opposed to manufactured goods caused by the Chipotle scare, a general run-up in the stock market as other investments fail to yield profits, and a lack of concern over the corporatization of food generally. These are trends that are not going to grow to the sky.
If I had McDonald’s stock, I’d be selling, not buying. MCD peaked in May at over $130/share and I doubt it’s going back there any time soon.
Not until Easterbrook can pull another rabbit out of his top hat.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
