Why McDonald's will top $100 again

The fast-food king faces increasingly fierce competition and a soft global economy, but its stock is still worth a buy.

By Jim J. Jubak Nov 14, 2012 2:39PM
A sign outside the fast-food chain McDonald'sWait until next year.

I think that's the message in McDonald's (MCD) disappointing Nov. 8 report of same-store sales numbers. Sales at stores open for at least 13 months fell 1.8% in October. That was the first monthly decline in same-store sales in nine years for McDonald's. 

Even taking into account a calendar shift that put one less Saturday in October this year than in 2012, the drop sent a significant signal. Competitors have upped their game while a soft economy in the United States, China, and Europe has resulted in cutthroat price competition. Finally, McDonald's recent success in taking market share has resulted in very tough month-to-month growth comparisons for McDonald's.

These three factors suggest that investors will have to wait until April or May of 2013 to see a sustained upwards move in McDonald's shares. (McDonald's is a member of my Jubak’s Picks

Economic growth will -- probably -- pick up in China and the United States in the first half of 2013. McDonald’s is putting in place new menu items and sales initiatives that will, over time, blunt the current momentum of Burger King (BKW), Yum Brands' (YUM) Taco Bell and Wendy's (WEN). And the toughest same-store sales growth comparisons will be behind the company by April 2013.

I think the stock is likely to be a market performer until then -- with its fortunes tied to the trends in the larger market. But the stock does pay a 3.6% dividend and after the decline to $84.76 at the Nov. 13 close from $94.09 on Oct. 16, I think most of the bad news about same-store sales growth is now priced into the shares.

Your decision to hold on until April -- collecting that 3.6% dividend -- or to sell now with the idea of re-buying in the early spring depends on how good a trader you think you are, how aggressive your strategy is, and what alternative ideas you might have for putting cash to work right now.

Make no mistake about it, though; these are tough times in the quick-service restaurant sector, even for a company with McDonald's resources. Everybody has introduced and is heavily promoting a value menu. Everybody is rolling out new products -- Son of Baconator at Wendy’s, Doritos Locos Tacos at Taco Bell, Cinnabon Minibon Rolls at Burger King. Some new products unabashedly follow McDonald’s lead -- smoothies at Burger King, for example.

Fast food is now played like a giant game of leapfrog. One company jumps over the other by finding a particularly successful way to tweak its value menu or introducing a particularly successful sandwich and temporarily draws sales across the playing field.

What has separated McDonald’s from the competition in recent years, though, isn’t the temporary ebb and flow of sales from menu and product innovation, but the ability to produce a steady stream of those innovations that competitors haven’t been able to match. Couple that with McDonald’s huge edge in financial muscle that lets the company refresh restaurants more rapidly than competitors and install new cooking and order-taking systems that speed up food preparation and lower customer wait times, and you’re got a formula for long-term success. 

In general, you should only sell McDonald’s shares if 1) you think the normal ebb and flow in the company’s sector is headed into a temporary flow away from McDonald’s so that you’ll be able to take profits now and buy back in at a lower price later, or 2) you see evidence that the McDonald’s system is showing a decline in innovation and a loss of focus on pressing home its competitive advantages.

I don’t see evidence of that second problem now.

And the stock’s 10% drop from Oct.16 has narrowed your window for selling and then rebuying. The stock has solid support from $80 to $85. Below that the next support shows up at around $72, about 14% lower than today’s price. I don’t look to see McDonald’s back at that level from the first half of 2011 unless the overall U.S. economy and stock market takes a dive. (And if I did I would certainly be a buyer.) And even then the stock’s 3.6% dividend should make the shares a relatively stable performer unless the overall market sells off heavily.

I calculate a target price of $104 a share by October 2013.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of McDonald’s as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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35Comments
Nov 14, 2012 3:32PM
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Perhaps the reason McDonalds will do well is that most Americans can only afford to eat out at the golden arches.

Nov 14, 2012 3:27PM
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I bet Mcdonalds will do well. It will be the only place anyone can afford after electing obama again.
Nov 14, 2012 3:34PM
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"Why McDonald's will top $100 again"

Because it's the only thing other than top ramen, that people will be able to afford.
Nov 14, 2012 3:22PM
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erpjust install EBT card scannners and MacD will go off the charts.
Nov 14, 2012 3:34PM
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Has Michelle's " FOOD POLICE " in our kid's school cafeteria been placed on notice?
Nov 14, 2012 4:27PM
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Because they will start accepting food stamps
Nov 14, 2012 4:09PM
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McDonalds needs to concentrate more on what people go there for, burgers and fries that 4 generations grew up with. Sure they are bad for you so we might as well enjoy them before Big Brother and the food police and Michelle O-oh-oh-no make them history. I don't go there for sugary sweet Smoothies, overpriced nasty pasty cold oatmeal or stale muffins. some of the egg muffins at breakfast you can get with coffee under $5 are passable, at least they don't have their hand out for gratitudes besides !! Us retired folks  maybe once or twice a year we can still find nostalgia in the taste at Mickey-D's, and sometimes a McDouble as my old dog loves them. I plan to hang onto my shares.
Nov 14, 2012 8:13PM
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I sold a put option spread. If this recent decline sticks around, I'll be owning a couple hundred shares of MCD but I am not at all worried about it. That target seems pretty sporty but I still find MCD to be a solid stock with a solid yield. I wouldn't mind owning it at these prices.
Nov 23, 2012 11:33AM
Nov 26, 2012 3:11PM
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McDonalds uses much better food safety practices and is much cleaner than any "fine dining" operation. I am not claiming that their food ingredients are to be compared to a 4 star+ restaurant, but if you saw the back of the house in both places, I can with certainty say you would prefer McD's.  I have been in food and beverage industry all my adult life and am an executive chef now. 
Dec 7, 2012 7:13AM
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McDonalds is the only stock that you can buy and hold for 30 years.  At some point you can sell it for more than you bought if for.  Also, the 3.6 % dividend is better than Treasury bond yields.  There are better stocks out there, but NOT a safer one.  BUY  MCD   at $85 or $90.  Sell at $100 or $105.  Simple.
Nov 23, 2012 8:03PM
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Actually, it will be back on the rise because the new Marijuana laws. I don't know many stoners who can cook and the ones that can probably will be too lazy to do so when they have the munchies.
Dec 12, 2012 8:56AM
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Many Americans have figured out why we as a nation are so sick with cancer, diabetes, and a list of other diseases.  We are now trying to feed our kids better food too.  Fast food places with their food loaded with sodium and other chemicals,toxins will struggle into the future.  Don't believe what you read.  Watch what is going on around you.  Notice any health food stores in your area with full parking lots?  Consumers in America are waking up!

Nov 14, 2012 7:07PM
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Mickie dees is on the low, their food has lost quality,the are only concerned with quanity!
Nov 14, 2012 4:16PM
Nov 14, 2012 4:31PM
Nov 14, 2012 4:19PM
Nov 14, 2012 3:39PM
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Mcdonald's food is getting smaller by the day and costing alot more..They want a 10.00 Big Mac..They should be shut down..
Nov 14, 2012 4:28PM
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I can't see a profit  they have ruined their French Fries.  Their food is horrible. If I choose to eat at fast food I know it may not be healthy  but I want my French Fries to taste good not like day old
Nov 14, 2012 4:26PM
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I found a new McDonalds tee shirt I thought was funny.  Instead of saying I'm loving it it says, I'm fat.
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