McDonald's (MCD) has come into favor again with certain analysts even though the stock is not showing strong bullish signals yet. Could this be because of the chicken wing testing that has been done? Is there a bright future for this product at the national level for the company?
In a report published Monday, Sterne Agee Group reiterated its Buy rating and $101.00 price target on McDonald's Corporation. This is the reasoning it gave:
"Recent channel checks indicate that MCD will be testing chicken wings ('Mighty Wings') in a second major market (Chicago) beginning this week. Given that we believe that the Atlanta test proved successful, we believe that it is likely that we will continue to see additional MCD markets featuring wings and would not rule out a national launch in the future."
In Atlanta, the company tested the deep fried wings last summer. There is a strategic reason to this besides just food. The new CEO, Donald Thompson, stated that he would like to focus on chicken (chicken is less expensive than beef, so this may help McDonald's bottom line). Now the move is another test market - Chicago. This chicken will be sold in about 500 stores in groups of 3, 5 and 10 wings. This makes sense. Not only is chicken less expensive to buy, but McDonald's sells more chicken than beef.
Some consumers liked the taste and others who stated that $1.00 per wing seems expensive for fast food. One blogger on Yelp wrote: "I actually considered trying them when I first saw them on the menu. But then I saw that they cost about $1 per wing. That's a bit much for a wing." Another blogger thought they were tasty and had enough meat, but also was concerned about the price. The blogger wrote: "For the price, they won't be a staple of my diet, but I was surprised by just how tasty they were."
What type of challenges will the fast food chain face? First of all, wings are becoming very popular and served in many places. For this reason, the price of wings continues to climb. Between (2008-'09), the price for wholesale chicken wings increased by $0.39 per pound. From (2011-'12), wing prices increased $0.29 a pound. Prices will continue to climb as demand increases. That's the first challenge McDonald's faces. The second challenge may be the "fast food" concept. Since the majority of food is bought through the drive in, it is eaten in the car. Will people buy the "Mighty Wings" and eat it in the car or will it be too challenging?
Generally speaking, there may not be a better fast food restaurant with global recognition name brand than McDonald's. When customers go to get food there, they know it will be less expensive than a sit in restaurant.
The stock has journeyed up since mid-November, but there are signs that the move may not continue much longer. It is on its second leg of a move up and indicators are showing signs of a slowdown coming. The MACD MA's and the Histogram are showing a negative divergence within the indicator itself. This usually signals consolidation when alone. As I observe the RSI indicator, I am seeing a slight negative divergence, so I do not put much credence on it, but it is something to be aware of. Since the stock is coming to an important resistance point, the slowdown is understandable. I would not be surprised to see the lower Bollinger Band to become support again on another pullback.
The Options Play
I am looking at a pullback for a short-term income play as the stock is presently 91.01. Look at buying a put option straight up for a resale as the stock consolidates on a short-term pullback.
- Buy the February 2013 put with a strike of '90' (priced at $0.85).
- Net Debit to start: $0.85.
- Maximum Profit: unlimited (value of stock).
- Maximum Risk: net debit.
- Maximum Length of Play: 4 weeks.
Reasoning behind the Trade
Even though the stock is moving up, it looks like it will pull back in the short term. Longer term may continue to be bullish but I am looking to capitalize on a short-term pullback here.