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McDonald’s Real Problem Is…

McDonald’s (MCD) is getting a lot of news as it transitions into the New Era. I see the headlines come across, but just can’t get excited enough to believe management can change the culture.

Healthier food (I just saw an ad for the grilled chicken sandwich and how healthy it is), franchising, and the return of the Hamburgler are out on the table. But the big problem with McDonald’s isn’t being discussed. Because the media doesn’t want to talk about it.

McDonald’s #1 issue it needs to resolve is to get the homeless people to leave.

When I walk into my local McDonald’s on 3rd ave and 32nd st there’s more likely a homeless person outside. Sometimes there’s 2 or 3 shady characters lurking, chatting, asking for money. You can tell something is going on drug-wise too, maybe one of the guys selling. Walk inside and its more of the same. Homeless people use it as their home, a place to get warm (or cool) and sit down a bit. Your goal is to find an empty clean table.

It’s not a good scene. Walking in the first impression is: Ugh. Then you’re aware the food isn’t healthy (most isn’t then your mind assumes). Starbucks has college students and McDonald’s has bums. That’s the real issue. The fix is to hire someone who will (A) walk outside and deter hangouts (B) clean up the tables (C) be charismatic to customers. This is probably a manager. Then the company can focus on healthy food (need more of it as a %) and I’m a firm believer management will correct that issue. This company can transform, it has decade after decade.

One Year Chart

MCD_2015_Q2The second biggest issue MCD has is the P/E ratio of 20 is high. From 2010-2013 MCD had a median P/E ratio of 16 to 17 each year. Now 20 times? Profits are in a rut, I don’t think so.

Notice the quarterly profit history along the bottom. Ugh. I’m guessing if the company just has mediocre qtrs later in the year then the profit growth rate will look good, and get headlines, and people excited.

Fair Value

MCD_2015_Q2_FVThe trouble with this situation is the stock’s already high. Turnaround opportunities depend on a stock that’s regressed, and if management can change things then you get a healthy return buy getting in low. Maybe make 40%. But McDonald’s is already high.

Looking at the profit history, MCD is expected to make $4.78 this year, down from a high of $5.55 in 2013. Let’s say the company does make $4.78 (even though this 2015 estimate has fallen from $6.11 just 4 qtrs ago). If profits then grow 12% in each of the next two years, to $6, then a 17 P/E would take the stock to $102. But that’s two years out. And a 5% total return plus dividends, which are another 6% or so.

Sharek’s Take

McDonald’s has a lot of work ahead, and you can rest assured it will get a better menu and bring people back into the stores. Unfortunately the stock is just to expensive, so MCD isn’t a worthwhile investment at this price. Look to get in at $90.

View the Earnings Table here.
View the Profit History here.
View the Ten Year Chart here.

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