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Takeaway: Short $MCD was added to our Real-Time Positions this morning. The positive $MCD reaction to $YUM's EPS was not warranted.

We don’t think the time is right to buy MCD – yet.  The stock reacted favorably to the YUM 3Q earnings results.  These are two well-run, global companies in the same industry but we think there are some important caveats to bear in mind when comparing their respective outlooks.

This morning, we added MCD on the short side to our Real Time Positions as the stock was overbought from an immediate-term TRADE perspective.  Our fundamental outlook matches Hedgeye CEO Keith McCullough’s quantitative setup.  

Fundamental Outlook

We took a step back from our positive stance on the stock in April and we think it will be at least another couple of months before we become constructive on the name again.  While downside in the stock is likely not substantial, we think that the positive reaction in McDonald’s stock today is overdone for two reasons:

  1. As our note following McDonald’s November sales release, “MCD SALES HUNKERING DOWN FOR WINTER” described, compares ramp up dramatically through February for the company’s US division.  Yum! Brands’ US business is also bumping up against a difficult compare in 4Q but the domestic business, for YUM, is far less important than it is for MCD. 
  2. The YUM results were initially viewed as a positive for MCD and SBUX in that they could imply a diminished risk of disappointing 3Q results in China for those two companies.  While YUM’s China results were strong, it was largely margin-driven.  Comparable sales decelerated sequentially in 3Q and are expected to continue to do so in 4Q.  An additional important caveat is that YUM’s fiscal 3Q ended on 9/8; the full third calendar quarter may not look so positive in China, especially given some of the recent disappointing macroeconomic data for September. 

McDonald’s faces plenty of risks over the next few months as the euro-crisis continues to drag on, and Growth Slowing in the US and Asia drags on consumer spending.  We are waiting for the right time to get behind this stock, especially given the company’s resilient performance in prior periods of poor economic growth, but believe that to do so now would be premature. 

IDEA ALERT: SHORTING MCD - mcd us comps

Quantitative Outlook

Per Keith’s quantitative models, immediate-term TRADE support for MCD is at $90.18.  Long-term TAIL resistance is at $93.35

IDEA ALERT: SHORTING MCD - mcd levels

Howard Penney

Managing Director

Rory Green

Analyst