Should You Buy The Burger Bump?

 

 

On January 28, McDonald’s (MCD) CEO Don Thompson resigned after 25 years with the company.

In his stead, the burger chain announced it’ll turn to fast-casual veteran and past McDonald’s employee, Steve Easterbrook, to right the ship.

The market responded positively to the news last Thursday, sending shares up more than 5%… but problems remain at the world’s top-grossing fast food chain (aside from the disturbing fact that its burgers apparently never go bad).

So the question is: Should investors be lovin’ this former market darling, or is McDonald’s beyond saving?

After all, McDonald’s has been a defensive favorite for years, and it still sports a very respectable 3.65% dividend yield.

Plus, it’s a Dividend Aristocrat with a 38-year history of dividend growth – and the stock doesn’t even look that expensive at the moment.

However, this isn’t a valuation story.

Ultimately, I’m not convinced that a change in leadership is enough to get McDonald’s back on track, and there are several reasons why.

A Tough 2014

First of all, the stock has underperformed the S&P 500 (SPY) consistently for three years now – and 2014 was a particularly rough year for Ronald and company.

Operating income was down 15% in the fourth quarter of 2014 and down 8% for the year. Earnings per share were down 14% in Q4 and 11% in 2014. Finally, revenue was down 7% in 2014 compared to the year prior.

To put that into perspective, Burger King reported 5% revenue growth and an 18% increase in diluted earnings per share in the third quarter of 2014.

Meanwhile, same-store sales growth paints an even more damning picture. McDonald’s reported a decline in global same-store sales of 0.9% in Q4 2014, while same-store sales in the United States fell 1.7%.

Compare that to Wendy’s (WEN), which reported 5.2% same-store sales growth in its most recent quarter, and Burger King, which reported its fourth consecutive quarter of same-store sales growth and the best quarter of comparable sales growth since 2012.

2015 Won’t Be Much Better

Despite a change in leadership, 2015 will likely be another tough year for McDonald’s.

One reason is the skyrocketing U.S. dollar. About 70% of McDonald’s revenue comes from overseas markets, where foreign currencies are facing a major headwind that doesn’t show any signs of dispersing.

Thus, McDonald’s expects a negative translation in the first quarter amounting to $0.10 per share, and estimates a negative translation of a whopping $0.35 to $0.40 per share for all of 2015.

Meanwhile, problems that plagued McDonald’s in 2014 – including a supplier issue in Japan and a volatile operating environment in Russia and Ukraine – will continue putting pressure on the company this year.

In particular, Japan is facing a major consumer perception problem that began last summer when its Chinese supplier was accused of selling expired meat. After switching suppliers, Japanese customers then found several unsavory objects – including a tooth and a small strip of vinyl – in their food.

Needless to say, the Japanese appetite for Chicken McNuggets has been quelled for the time being.

Yet the biggest reason I remain bearish on McDonald’s goes beyond the numbers. 

People Simply Don’t Want McDonald’s

The fact is, McDonald’s has missed the boat on the fast-casual trend that’s dominating the restaurant industry right now. It even had the winning lottery ticket in hand… but decided to spin Chipotle (CMG) off rather than re-direct its entire business down that path.

Who knows… perhaps Easterbrook can find a way to convince consumers who want ethical, local, healthy food that McDonald’s offers all of those things. But the company has spent decades building a global giant based on the idea that consumers wanted cheap, affordable food – regardless of its origin or how it tasted.

Changing public perception and re-capturing the fast food audience, therefore, will probably take more than just a shakeup at the top of the corporate ladder.