MACRO DOWNSIZES MCD

Short term trading opportunities notwithstanding, we’d avoid MCD on the long side for now.  The second quarter results and conference call will offer investors more clarity on the business’ prospects for the next year-to-eighteen months.

 

McDonald’s reported May sales results this morning and, as we suspected, sales disappointed as Global Growth Slowing meant that MCD comps came in below expectations in all regions. Comping the comps in the U.S., Germany slump in Europe, and negative comps in China are important issues going forward.

 

McDonald’s reported global comparable sales growth of 3.3% in May, which represented deceleration in the two-year average trend from April.  McDonald’s continues to take share from its competitors in major markets and we are positive on the name over the longer term TAIL (three years or less).  Over the near-term, however, we see a difficult compare in June as posing more headline risk for the stock.  Additionally, the FX headwinds that are expected to peak in 2Q and 3Q could cause investors to shy away from McDonald’s in any search for safe plays in the consumer space over the next few months.

 

MACRO DOWNSIZES MCD - mcd global

 

 

United States

 

McDonald’s U.S. comparable restaurant sales gained 4.4%, slightly ahead of our estimate of 4% and below consensus of 5.3%, according to Consensus Metrix.  With price running at 3%, traffic/mix of 1.4% was short of what the Street was expecting.  The question we would ask at this point is whether the Street is overestimating the ability of the company to drive guest counts through the summer.  As we wrote on 4/23/12, “The evidence suggests that beverages are increasingly becoming a less important part of the vocabulary from McDonald’s’ management team.  With that in mind, foremost in our thoughts is what the company’s strategy will be to maintain top-line momentum over the next few months.” 

 

MACRO DOWNSIZES MCD - mcd us comps

 

 

Europe

 

Management stated that the U.K., Russia, and France drove the 2.9% comp in May, partially offset by Germany.  We expect Germany to be a key focus for investors heading into the second quarter earnings release on 7/23.  Europe represents 40% of total revenues and 39% of total operating profit for McDonald’s.  Overall, the print was a disappointment versus the consensus of 5.1% and the macro environment remains a concern.

 

MACRO DOWNSIZES MCD - mcd  eu comps

 

 

APMEA

 

APMEA comparable restaurant sales were perhaps the most glaring of the disappointments in the MCD press release; versus consensus expectations of 3.2%, the print came in at -1.7%.  Japan (SSS -11% in May!) and, to a lesser extent, China drove the comp lower.  Australia posted some positive results that partially offset the slump in China and Japan.  While we view the U.S. and Europe as being far more important than APMEA (18% of operating income), a disappointment of this magnitude in an important growth region for the company is not positive news.

 

MACRO DOWNSIZES MCD - mcd apmea comps

 

 

It has an Extra Value Menu but it is an Extra Value Stock?

 

The question now is, “does McDonald’s stock represent a compelling value purchase, even if its menu offerings may not?” 

 

If you believe valuation is a catalyst, then buying the stock here is likely a good idea.  The stock is nearing the bottom of its five-year valuation range and has typically been a safe haven for investors in weaker economic times.  In early March, however, the first mention of austerity impacting Europe moved us to write the following: “We are not buyers of the stock on this selloff.  In short, if austerity is having an impact it will not be a one month phenomenon.” 

 

The uncertainty in McDonald’s results is somewhat new and forecasting FY12 and FY13 EBITDA is only becoming more difficult as uncertainty mounts.  The volatility in the economies that McDonald’s operates in is, in some cases, so great that the staple nature of the company’s product is not sheltering sales to the extent that it has historically.  Observers, including us, are often tempted to assume that the company’s value offerings will perpetuate strong sales growth.  At this point, we lack confidence that the company has a sufficiently impactful pipeline of promotions to comp the strong U.S. performance during summer 2011.

 

If the Street is overly optimistic on management’s ability to drive traffic over the coming months, the cheap may get cheaper.  Short term trading opportunities notwithstanding, we’d avoid MCD on the long side for now.  The second quarter results and conference call will offer investors more clarity on the business’ prospects for the next year-to-eighteen months.

 

MACRO DOWNSIZES MCD - mcd ev to ebitda valuation

 

MACRO DOWNSIZES MCD - mcd ev ebitda price

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst



Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more