S Is McDonald's A Revival Story In 2015?

Resignation of McDonald’s USA president Jeff Stratton has surely added to the list of problems being faced by this fast-food giant. Shares of McDonald’s (MCD) have skidded more than 9 percent over the past few months. This is the worst decline the company has seen in over a decade; investors have now started questioning the safety of their investment in MCD.

Burger King (BKW) and Tim Hortons (THI) are the biggest competitors of McDonald’s in the fast-food market and their $12.5 billion merger deal makes them the third largest fast-food company in the world. This deal has intensified competition for McDonald’s, which posted flat global same-store sales in the second quarter of 2014. With same-store sales falling 3.2 percent for US markets, other market segments including Asia-Pacific, Middle East as well as Africa have also shown weak numbers. Followed by labor issues in America and food safety scandals in China, it seems that golden luster of the Golden Arches is fading away. Are MCD shares going to witness rock bottom prices or will the stock regain its sizzle? Most analysts agree that just as in earlier setbacks, McDonald's will be able to ride over this temporary setback.

Poor sales growth has severely affected recent stock prices and has resulted in a poor performance of Standard & Poor’s 500 Restaurants Index. The stock has fallen from $102.0 to $94.0 since May 2014, and this is one of the sharpest declines shareholders have seen in the last decade. Considered to be the largest restaurant company by revenue, the company’s sales have been dwindling over the past year. Numbers for US stores have slumped for the third month in a row, analysts predicted a slump of around 2.6 percent, but domestic numbers have dropped by 3.5 percent. Food scarcity in Asia has hurt McDonald’s revenue in Asia-Pacific region with sales down by 7.3 percent. McDonald’s outlets in Africa and Middle East have also reported bigger than estimated loss in sales. Nearly 32 percent of the revenue McDonald’s earned is from domestic outlets, and the company has been struggling to attract younger crowds. Once a mainstay of McDonald’s business, young diners today are seeking healthier and fresher food chains that offer customized menus. In this space, Chipotle Mexican Grill, Inc. (CMG) is one of the fastest growing names. MCD shares are about 2 percent lower since the start of the year and closed at $94.45 last Friday.

Currently, McDonald's holds a market capitalization of $92 billion and gives a yield of 3.5 percent Don Thompson took reins of the company as the Chief Executive around 2 years back, and since then, shares of MCD have traded in a narrower range. In contrast, stock prices of competing fast-food companies have surged higher in the same time period.  Even with falling revenue, McDonald’s has a current yield of 3.5 percent, and it is an attractive number for investors. There have been talks of the company serving a 10 percent dividend increase which makes MCD a very attractive option for investors looking for growth. Despite deteriorating revenues, MCD shares are still rated as ‘Buy’ and given a rating score ‘B’ by TheStreet Ratings Team.

This confidence is driven by multiple strengths of the company, and it is expected that these strengths will have greater influence on the price of the stock. On August 8, McDonald’s stock had plummeted to a 52 week low of $92.22 a share. Savvy market watchers believed that it was a compelling price to buy this attractive stock for anyone looking for a long term investment. An independent investment research firm stated that McDonald’s has provided the widest economic moat ratings in the industry of fast-food restaurants and this moat protection is due to a variety of factors.

Conclusion

Right from conveniently located restaurants, strong intangible brand assets, cohesive systems of franchising and a successful 8 year run, there are several reasons why investors still have confidence that MCD will outperform its competitors. News of the company planning to return amounts between $18 billion to $20 billion to investors, reveals the commitment of the company to reward its investors. Expected to be done over a period of two years, this return will be a combination of share repurchases and dividends. It is one of the prime reasons why MCD stock prices are expected to rise.

Although the performance of MCD has not been appealing over the past few years, it would not be wise to count McDonald’s out of competition. With the company already making efforts, this fast-food chain can rescue its brand and make history, again.

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Comments

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Lacey Cahr 6 years ago Member's comment

Look like @[Shazir Mucklai](user:5938) called $MCD a while ago. It's sales are soaring with a nearly 6% increase. Wish I had listen then but I am following you now.

money.cnn.com/.../index.html

Clark Winslow 7 years ago Member's comment

What other stocks do you recommend?

John Fitch 7 years ago Member's comment

Agree with you here Shazir. I think McDonald's rebounds to reclaim past highs in the $100's. It is a powerful global brand that is not disappearing any time soon. The healthy food revolution is definitely a detriment to MCD's revenue, however, I expect McDonald's to start rolling out more and more healthy alternatives.

Joel Santiago 7 years ago Member's comment

I agree. McDonalds is poised for a major comeback!