MCD: Why We Are Short

Although our short thesis is complicated, it can effectively be boiled down to one chart.


MCD plans to release August sales numbers on September 9th and we have a sneaking suspicion it will be a negative event.  In all likelihood, it will lead the street to revise down its full-year sales and earnings estimates.


Recall that McDonald's global same-store sales declined -2.5% in July and we'd expect August to yield similar results. 


In July, performance by segment was:

  • U.S. -3.2%
  • Europe +0.5%
  • APMEA -7.3%


Currently, 3Q14 consensus estimates by segment are:

  • U.S. -2.0%
  • Europe -0.7%
  • APMEA -5.8%


EPS Estimates are too Aggressive

Consensus currently expects MCD to report flat sales and earnings growth in 3Q14.  This looks aggressive, however, considering system-wide sales declined -0.5% in July and are likely to be down again in August.  Flat sales growth is too optimistic and, given the negative leverage inherent in the business model, reporting a flat EPS number is also unlikely.


The street expects MCD to post $1.52 in earnings in 3Q14 after posting the same number last year.  It also expects MCD to post 1.4% EPS growth in 4Q14.  Both of these numbers are, in our view, aggressive.


With a recovery, albeit minor, built into 4Q14 estimates, the trend line is expected to accelerate to 8% EPS growth by 1Q15 and stay at that run-rate for the remainder of 2015.  We often hear the bulls cite easy comparisons to defend their optimism, but the reality is we've been hearing that for several years.  2014 was a time of easy comparisons for the company and it isn't close to hitting estimates published at the beginning of the year.


From our perspective, management isn't willing to take the necessary steps to fix the business and, until this happens, we expect MCD to consistently underperform expectations.


MCD: Why We Are Short - 1


Risk/Reward Setup Suggests the Stock Is a Short

MCD is currently trading at 15.9x the NTM EPS of $5.87, but looks substantially more expensive when assuming that $5.87 is far too aggressive.  Barring some unexpected event, the odds that MCD delivers 8% EPS growth in FY15 are slim-to-none.


We believe that in 2014 MCD could report its first down year in EPS growth since 2002, as we expect full-year EPS to come in between $5.40-5.45 or 2-3% below the current consensus estimate.  More importantly, we suspect McDonald's will even struggle to grow EPS off of this lower $5.40-5.45 base.  As a result, our 2015 EPS estimate of $5.45 is nearly 10% below the current consensus estimate of $6.02.


MCD: Why We Are Short - 2


Looking out over the next six months, assuming a constant multiple of 15.9x on our NTM EPS estimate of $5.40 gives us an $85 stock representing approximately 9-10% downside from current levels.  We understand this is not a "major blow-up," but if the stock saw a little multiple compression (down to the 14-15x range) we're talking about 15-20% downside or about a $12-20 billion decline in market cap.


MCD: Why We Are Short - 3


Feel free to email or call with questions.


Howard Penney

Managing Director


Fred Masotta


Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more