THE HEDGEYE EDGE
I (Howard Penney) have now listened to nearly 100 McDonald's (MCD) earnings calls, spanning 7 CEO’s. I was a big fan of the changes Steve Easterbrook was making in the early days of his tenure as CEO. In the nearly 4 years he has been CEO there have been a significant amount of positive changes at the company. There have also been some changes that have sent the company down the wrong path, leading to significant disappointments. The most obvious disappointment was the hiring of Chris Kempczinski, the head of MCD USA. Chris’s inability to understand how important the franchisees are to the company has led to the formation of the National Owners Association. An organization the company has never needed in its 50 year history. Over the years there have been issues with the franchisees, but nothing like what we are seeing today.
These are extraordinary times for the company, and it appears the current CEO is in denial of the realities of the business. Until changes are made at the top, MCD’s operating performance will continue to disappoint.
IGNORING REALITY – On the recent earnings call, when asked about the current disagreements with the franchisees, the current CEO said, “sometimes it just bubbles up a little” and went on to downplay the current situation. Does the CEO realize that the franchisee community has publicly trashed all the current growth drivers as ineffective? Given that the MCD management team is downplaying the issues, the street is likely also downplaying the issues. These issues are real and need to be resolved before the stock will outperform.
DECELERATING DOMESTIC/INTERNATIONAL SALES – MCD just reported its worst traffic count since 2014. It’s that type of performance that gets CEO’s fired at MCD. The stock is doing too well for the current CEO to get fired, but he is on a short leash. Two out of the three years the CEO has been running the company MCD has seen declining transactions, and it looks like 2019 will be another year of the same. We believe that it’s going to be a challenge for MCD to grow SSS greater than 2% in 2019 and there is a real possibility that sales turn negative in 2H19. Outside of the USA, MCD is seeing better results. There is a real possibility that we see a deceleration in key operating regions around the world.
MISSING NUMBERS – Current street estimates have MCD growing EPS by 3% in 2019, following 18% in 2018. This number has come down by 2% following the 4Q18 earnings result. We believe that these numbers are still too high for MCD and that it is doubtful that MCD will show EPS growth in 2019. Given the troubles the company is having, it’s going to be unlikely that this will be a one-year issue for the company. With a management team in denial of the issues, real changes to the operating performance will not happen.
We see -25%+ downside from current levels.
ONE-YEAR TRAILING CHART
