1) Why is this happening?
2) What should I do about it?
To answer the first question, the slide is likely partly due to an overall market decline; the S&P is down 4.4% from November 24th. The long bull trend was nice while it lasted, but volatility is picking up as investors are becoming more skittish. However, most of that drop has occurred in the past week. MCD has a few other explanations…
First is just the general trend in America towards healthy eating and fast food avoidance. Diners are seeking out fresher, healthier food that can be offered for nearly the same price as a combo meal. McDonald’s is struggling trying to reach millennials with new marketing strategies and ad campaigns. Even with items such as the McWrap sandwich, designed to woo millennials, younger customers are defecting to fast-casual restaurants such as Chipotle Mexican Grill Inc., leaving Mickey D’s in the dust.
On top of that, McDonald’s announced that global comparable sales are down 2.2%, due to difficulties reaching the global market. As recently as yesterday, news reports indicated that Japanese McDonald’s were running out of fries. Due to industrial action in America, they can’t get enough potatoes for their restaurants and are forced to ration supplies. This may lead to damage with McDonald’s bottom line as well as with the company’s reputation, based on reliability, consistency and delicious French fries.
Now for the second question – the first thing that comes to my mind is the growth potential of the stock. Size almost always slows down growth. It is much easier for a $1 billion company to grow into a $2 billion company than it is for a $10 billion company to grow into a $20 billion company. McDonald’s is a huge corporation and growth will likely not be as fast as it has been in previous years. Nonetheless, it serves as a good dividend stock with a healthy yield of 3.83%. It has good profit margins and decent revenue growth. Finally, it’s safe to assume McDonald’s won’t go bankrupt anytime soon.
However, while fairly steady in the past, MCD earnings per share declined 28% in the most recent quarter compared to the same quarter last year. The company has had volatile earnings, not the steady growth preferred by defensive investors. It would not be a stretch to think MCD’s EPS won’t meet expectations, or decline again.
MCD’s price-to-book value is a high 6.30 but the PEG is 1.92, which isn’t too bad. Would a pure value investor fall in love with McDonald’s stock? It’s not likely. Yet, the price has not been below $88 since 2012. Knowing this, one must dig deep and ask, “If McDonald’s stock does fall more, how much lower can it go?” It seems that it shouldn’t go too much lower. Even with a general correction or bear market, McDonald’s shouldn’t do too badly. Investors and institutions alike will switch over their funds for the dividend. With the recent price decline, perhaps that switch should occur now.
My verdict: if you have McDonald’s stock, hold it. If you do not have McDonald’s stock, I would add a small amount now, increasing your holding if the price declines more. The stock probably won’t make you a fortune, but a few extra dollars never hurt! It will probably close around $94-95 in a week.