McDonald's Roll Is Getting Stale
Investors are treating McDonald's like filet mignon when it's really more like Filet-O-Fish.
The fast-food chain blasted past Wall Street's expectations on Friday, posting a 3.5 percent sales increase in the third quarter from the year before. Shares shot up as much as 4 percent in pre-market trading. McDonald's has now racked up five straight quarters of rising same-store sales:
Its strength is particularly notable considering the rest of the restaurant industry seems to be melting down like a McGriddle. In the second quarter, restaurants in the Bloomberg Intelligence restaurant index posted their worst sales performance since the recession. Shares in the index are down 12 percent in the past year, compared to a 6 percent rise in the S&P 500. McDonald's shares are up 8 percent so far this year, but the stock has been sinking ever since hitting an all-time intraday high in May.
McDonald's, helped by its scale and largely franchised model, is still better-suited than many of its competitors to withstand the so-called restaurant recession. But it, too, will face challenges as restaurant-goers opt out of the drive-thru in favor of swinging by the grocery store for an increasing number of cheaper meals.
The real test for McDonald's will come during the next quarter. That's when sales will lap last year's U.S. roll-out of all-day breakfast. Perpetual Egg McMuffins helped stop nearly two years of sales declines and start the latest winning streak. If comparable sales turn negative again, then that could suggest McDonald's is running out of options to boost growth. Eliminating its dollar menu at a time when consumers are increasingly price-sensitive won't help, either.
The thing is, lower expectations are largely baked into the stock -- McDonald's executives last quarter started tempering expectations, admitting that in the short term they don't foresee much sales growth. The stock trades at 18 times forward earnings, compared to its two-year average multiple of around 20. More than half the analysts covering the company have a "hold" rating on the stock.
So if McDonald's can continue to under-promise and over-perform while the rest of the industry struggles, then it just might be able to pick up market share and keep investors satisfied.
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