McDonald’s (MCD) had a terrible quarter profit-wise last quarter. Profits fell 28% hurt by a same store sales drop of 3%. People going to fast-casual restaurants like Chipotle more often — and McDonald’s management has vowed changes — but this seems like an uphill battle. Managements grand plan is to de-clutter MCD’s menu to make it quicker and easier to order food, and to give people the ability to customize their orders through the McDonald’s Experience of the Future. I guess this means letting people order themselves on LCD screens and having them swipe the credit or debit card to pay immediately.
But the real problem is people want healthier eating, and don’t feel McDonald’s gives that. So management has a long road ahead. Computerized checkouts still give you mainly burgers and fries. That’s just not healthy enough.
One Year Chart
With all the bad news one would figure MCD was undervalued after the recent slump. But as the one-year chart shows, this isn’t the case. The stock sells for 16 times earnings right now, and the P/E is regularly 17. So that’s not a big discount considering profit growth was -28% last quarter.
MCD has an Est LTG of 5% per year, and pays a 3% dividend for an estimated 8% total return per year (guessing). Since McDonald’s is established with a very high degree of certainty and consistency, I’m thinking the stock is worth 15 times earnings.
Fair Value
And right now MCD has a P/E of 19. Wow, that’s high. During 2011, 2012 & 2013 the median P/E was 17 so even after the fall the stock’s too high. Looking out to 2015, a 15 P/E on estimated profits of $5.62 gets us a Fair Value of $84, a lot lower than the current quote of $95.
Sharek’s Take
McDonald’s has a lot to change to get momentum up, but it’s tackled bigger challenges before, such as the movie Supersize me hurting its image. I have no doubt the company will rise and conquer again. But stock wise, you’ve not getting it at a sale price right now. If you’re a long-term conservative investor and want to get some McDonald’s I think you should bide your time and wait for the stock to come down some more.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
