MCD was covered yesterday in the Hedgeye Virtual Portfolio. Although, I still remain bearish on the name for 2011.
In 1Q11, MCD continued to post industry-leading same-store sales in the U.S. (above my estimate), but now below the rate of inflation the company is experiencing. While the company has raised prices to absorb some of the commodity inflation, there is a strong possibility this could dampen sales trends given that MCD’s U.S. comps are largely guest-count driven (influenced by significant discounting).
Compound this scenario with the difficult year-over-year compares MCD U.S. is facing over the summer months and there is heightened risk of sales trends missing consensus in 2Q and 3Q11. Keith covered the stock today in the Hedgeye Virtual Portfolio and the quantitative risk management set up is illustrated in the chart below.
One pair-trade that could be of interest if you do not agree with my fundamental thesis on MCD would be short YUM and long MCD. The valuation spread between the two stocks is the widest it has been for some time on an EV/NTM EBITDA basis. Additionally, it is typically MCD that has been awarded a higher cash flow multiple by the street. As the chart below indicates, YUM is currently trading at significant premium to MCD.
YUM's premium multiple is being driven by strong trends in YUM's China division. To the degree that YUM's +13% same-store sales in China for 1Q is not sustainable, the valuation disparity between the two name could correct.
Howard Penney
Managing Director
