Wall Street starts to turn on McDonald's

4 analysts downgrade the stock the day after a disappointing quarterly report.

By MSN Money Partner Jul 23, 2014 3:48PM
Caption: A sign stands outside of a McDonald's restaurant in San Francisco
Credit: © Justin Sullivan/Getty ImagesBy Andria Cheng, MarketWatch

Consumers have been abandoning McDonald's (MCD) by not eating out as much or instead patronizing rivals like Chipotle Mexican Grill (CMG). Now, analysts, too, have soured on the company's stock.


Four analysts downgraded the company's stock on Wednesday, a day after the Oak Brook, Ill.-based company posted a disappointing second-quarter profit and full-year outlook amid a continued sales slowdown in the key markets of the U.S., Germany, Japan and Australia.


"The deteriorating fundamentals increase the likelihood of activist involvement," said Rachael Rothman, an analyst at Susquehanna Financial. She said the company's turnaround is taking longer than she expected and downgraded the stock to neutral from positive.


While McDonald’s Chief Executive Don Thompson evoked a sense of urgency on a conference call Tuesday, Wall Street said substantial improvement in sales and customer visits likely won't come any time soon. Meanwhile, the company is facing cost pressures, including higher prices for meat and other items.


U.S. sales at McDonald’s fell 1.5 percent as its low-income shoppers cut back on eating out or increasingly opt for the dollar menu items. Meanwhile, upper-income consumers are heading to chains like Chipotle, which reported a 17 percent jump in second-quarter sales.


To be sure, McDonald's isn't the only restaurant struggling to attract more consumers. NPD Group data on Wednesday showed U.S. consumers made some 61 billion visits to restaurants in the year through May, still below the pre-recession traffic levels by about 1.3 billion visits.


"There are some fundamental shifts in how consumers, particularly low- and middle-income consumers, address their discretionary spending," said Bonnie Riggs, NPD’s restaurant industry analyst. "Similar to the stalled growth other retail sectors are experiencing, restaurants are being negatively impacted by a large segment of the population who are watching their discretionary spending closely. Going to a restaurant is a nice-to-have and not a need-to-have."


McDonald's share of the global fast food market has declined to 13.7 percent in 2013 from a peak of 14.6 percent in 2009, according to Euromonitor data. In the U.S., market share has dropped during each of the past two years.


The percentage of analysts who now rank McDonald’s shares a buy has declined to 29 percent, the lowest level in at least five years, FactSet data showed. 


Here's what some other analysts had to say:


Lynne Collier at Sterne Agee: McDonald's "pipeline of new products has been lackluster," leading to market share losses. As we look forward, we do not see identifiable catalysts to reverse that trend." She lowered her view on the stock to neutral from buy.


Will Slabaugh at Stephens: "The lack of successful and differentiated products at low-to-mid tier level hasn't improved guest frequency." He cut his rating on McDonald's to equal-weight from overweight and lowered his rice target to $100 from $115.


David Tarantino at Robert W. Baird: "We are disappointed by the persistently sluggish (comparable sales) trends in recent periods." The declines in June and July "underscore the difficulty in regaining positive sales momentum amid a challenging/competitive environment." He lowered his rating to neutral from outperform.


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18Comments
Jul 23, 2014 4:18PM
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McDonald's is an old company with old ideas.  Whatever new ideas they have just aren't working.  They thrived for years with limited competition catering to people with kids.  Now they've taken out the playgrounds and revamped many of the stores into McCafe's.  Those "bistro" tables they have now that are 5 feet off the floor with bar stools for seats aren't conducive to kids.  And instead of 3 serious competitors like there were 25 years ago, they've got at least 15 now.  If it weren't for the dollar menu, they'd be in serious trouble.

I know the owner of a couple of our local McD's, and he says that at one of his locations, 80% of their business is done via the drive-thru and almost 40% is from the breakfast menu.  Perhaps they would be better off closing some dining rooms and operating some locations as purely a drive-thru restaurant.


Jul 23, 2014 5:03PM
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Not only is McDonald's menu processed, unhealthy food the prices are no longer cheap in comparison to many other fresh, healthy restaurant options.  The market trend is headed away from fast food and these businesses will suffer unless they can make quality food a priority.
Jul 23, 2014 4:45PM
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I love it, sales are down so NOW they downgrade.  Thanks for the big stock tip "experts." 
Jul 23, 2014 5:32PM
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WE HAVE A LOCAL RESTAURANT HERE IN SCOTTSDALE CALLED
"RANDY'S".   YOU CAN SIT DOWN, A WAITRESS COMES & TAKES
YOU ORDER FOR FOOD THAT COSTS NO MORE THEN A
MEAL AT McDONALDS.

Jul 23, 2014 5:10PM
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When you can eat at a sit down restaurant with somewhat better food than McDonalds for about the same price,  what did they expect?  They have raised prices on everything through the roof, except for the dollar menu. 
Jul 23, 2014 5:34PM
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With todays prices, you have to have good food if your gonna have a high price. For me and 2 kids to eat out at McD' or any other place it runs about $15-$20. I can make a heck of a good meal for that at home and for less and left overs.
Jul 23, 2014 6:47PM
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I eat at In-n-Out and remember when McD's sold real hamburgers and fries too!  I tried Chiptole's bean and rice burritos and would rather eat a grilled cheese.
Jul 23, 2014 5:48PM
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Gone are the French fries dipped in sugar water and the meals are healthier but less tasteful. The original McDonalds was not meant to replace home cooked healthy meals but be an treat for the kids and a break for mom from the kitchen. Now whole generations are raised on fast food that is prepared not for taste but to achieve profit and meet standards set by government agencies. .  If these standards were brought into our homes forget more than half of your family's secret food likes and deserts.   Also true the fact that many restaurants now offer reduced prices as competition is a lot higher across the industry from high end to hot dog stands. 
Jul 23, 2014 6:44PM
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Analysts will turn on ANY enterprise that does not continue to GROW! Consumers will turn on any product or service that does not continue to inflate their ego or stomachs.  Just wait until this ad click, mobile gadget and social networking bubble pops.  It's going to be really ugly!
Jul 24, 2014 1:16PM
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MSN was salivating heavily when writing this article and headline.

 

MSN hates mcdonalds and this downgrade is music to MSN's ears.

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Maybe its because their food tastes like cardboard. 
Jul 23, 2014 5:34PM
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         SIXTEEN DOLLARS FOR FOUR FILET-O-FISH! THEY TOLD ME THAT PRICE AND I WALKED RIGHT OUT. OVERPRICED, REDUCED SIZES, PIMPLE FACED KIDS WORKING THERE. I'D RATHER EAT A CAN OF CAT FOOD THAN EAT THERE.
Jul 23, 2014 11:03PM
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We've had trouble in recent years, that with some of the increased prices at "fast food" places..;

Why people don't go to sit down restaurants and be "served" better food for the same or lesser prices.


And then the option of "learning to cook" and eating about anything you want at home...

Much healthier, cheaper and usually much, much safer. (cleaner)..

Save eating out on occasion or for a treat.


Just about anything decent at Mickey D's is about $7.00 around here, for a fuller meal and drink.

And the prices don't vary too much except for C-O-L adjustments in Large Metro areas.

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