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McDonald's Fails At $100 Once Again

McDonald's Fails At $100 Once Again
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With the broad market at all-time highs, it is getting more and more difficult to find value in the market.

That rise makes it all the more tempting to examine issues that recently have been on the decline.

One such issue that meets this criteria is McDonald's (NYSE: MCD). Since making a new all-time high on May 14 at $103.78 (coincidentally only by a miniscule $0.08), the issue is now changing hands around $96.00.

Poor Ratings, Bad News

Two important factors may have contributed to this recent slide. First of all, the company missed Wall Street estimates for EPS for the second quarter in a row and has missed the mark in five of last eight quarters. Not only has MCD missed on the EPS figures, but it has also missed on revenue expectations in six of the last eight quarters.

On July 22, when it reported $1.40 versus $1.44 estimates, it fell short on revenue by $100m, which is more than double its revenue miss from last quarter of $40m. In addition, the $0.04 miss was its biggest one since October 2012, when it reported at $0.05 loss.

Another issue has been concerns over food quality and safety. Earlier this month, McDonald's suspended the use of meat products from Shanghai Husi Food in China after reports that Chinese officials suspected Shanghai Husi Food used meats past their due date.

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For a company already beset with quality of food concerns, investors did not take that news lightly and shaved nearly one and one half points from McDonald's during the following session ($98.99 to $97.55).

That news was announced on a Sunday, so not all investors heard the news, and the ones that found out late Monday sold on Tuesday, Juy 22. As a result, the issue lost another $1.28 on Tuesday. On Wednesday, the carnage continued as sellers took MCD under $95.00 to $94.82 for the first time since March 6, when it bottomed at $94.75.

Historical Perspective

Despite doubling from the October 2008 low ($46.00), most of McDonald's gains were achieved by January 2012, when it peaked for the first time over $100.00 at $102.22. Since that time it has been dead money, as it has traded in a $83.31 to $103.78 trading range.

In April 2013, the fast food chain attempted to put the huge psychological resistance level of $100.00 in the rear-view mirror for the second time. However, it improved on its all-time high ($103.70) only to retreat all the way to $92.22 in February of this year.

Once again, McDonald's mounted its assault in May and pushed its way backed to by a new all-time high, but only by $0.08 this time. From there, it drifted back to $100.00, and a double whammy of poor earnings and food quality issues instigated the final push to its current level.

Chart courtesy of Neovest

Analysts Not Helping Matters

All of the recent news has made Wall Street cautious on the issue. In fact, the last eight ratings changes have either been Maintains and lowering of price targets, or Downgrades with the lowering of price targets as well.

UBS remains the most bullish and maintained its Buy rating, but lowered its price target from $120.00 to $115.00 following its latest report. Janney Capital comes in with the lowest price target at $94.00 and views the issue as Overvalued at its current level.

What's Next?

Whether or not to purchase the issue at these current levels depends on your time frame and long-term expectations for the issue.

For an investor content with its 3.15 percent dividend yield and limited upside principal potential, the payout creates at least three points of downside protection if held for one year. That level is just above its yearly low of $92.22, which may provide support if the issue continues to decline. Also, if one employs this strategy and McDonald's revisits its all-time high, a decision to sell or hold on can be made at that time.

For investors looking to spice up their portfolio with a high-flyer that brings big risk and big rewards, Mickey-D's would not qualify as a likely candidate. The prolonged trading range is an indication of stagnation, and unless its earnings trend changes soon, more investors will be looking to exit the issue.

Many of these investors are in at much lower prices and will not hesitate to dump the issue at much lower levels.

Latest Ratings for MCD

Oct 2016NomuraMaintainsNeutral
Oct 2016Telsey Advisory GroupInitiates Coverage OnOutperform
Sep 2016CitigroupMaintainsNeutral

View More Analyst Ratings for MCD
View the Latest Analyst Ratings

Posted-In: ChinaTechnicals Movers & Shakers Restaurants Intraday Update Analyst Ratings Trading Ideas General Best of Benzinga


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