Let's face it, the market does not like uncertainty, and stocks typically go down amid uncertainty. There is a lot of uncertainty creeping into the McDonald's (NYSE:MCD) story. In my opinion one might be wise to take some or a lot of their profits off of the table and let the muddied waters clear a bit. McDonald's is losing momentum, which should slow the pace of the stock appreciating if not trigger a pullback.
Stockholders have had a great run in this stock especially the last five years seeing the share price ascending from around $55 to over $103 a share recently. Not too many stocks have performed more strongly and consistently. But, all good things must come to an end, or at least take a breather. I'm not saying that McDonald's isn't a good long term investment and shouldn't be a core holding in a portfolio for the value investor. However, from a growth perspective -easing up on your position in McDonald's may be prudent considering how you might have done in the stock and some of the difficulties the company is facing now. The growth prospects for this stock I believe have changed.
As of late, McDonald's is being hit on 3 fronts.
Front #1: Struggling to Make Earnings
Most recently you'll notice it trading down on double the usual daily volume on Friday. In a recent conference call it was mentioned that for the first time in a decade McDonald's announced that comparable sales worldwide fell 1 percent during the most recent quarterly period and it was the first quarterly decline in a decade in sales at restaurants open at least 13 months. The company struggled to post higher profits in the most recent quarter. Sales are down for the period over 1% in the US and Europe and more than 3.3% in Asian regions. It seems clear that the catalyst that had driven the stock price consistently higher over the last 5 years has become McDonald's achilles heel. Of note is the fact that they are being forced by a stagnant restaurant industry to continue to push the lowest margin products off of their dollar menu. McDonald's touts this as necessary to "steal" customers from competitors and they say it is working for now. This is not going to continue to work considering the cost of doing business and a company cannot continue relying on low margin products to drive growth. As investors, we want to invest in industries that are trending and growing - this doesn't seem like a formula for growth to continue.
Front # 2: Customer Service Affecting Profits
Prior to the disappointing quarterly results there have been reports of widespread customer service issues as being a reason for decreasing profits. I can see this being true if you are like me and have been in a McDonald's of late. I am a regular customer and I am often frustrated by the customer service in numerous restaurants in my area. I almost always go inside and find myself waiting 5 or more minutes just to purchase a beverage. There never seems to be more than one person at the registers and the line gets to be quite deep at times. Many times there are two or three customers waiting with arms folded (negative body language) for and order to be finished so they can sit down creating a log-jam in the lobby. Often times when you do get to the front of the line the cashier has no sense of urgency and no eagerness to provide you with a positive experience - they have no idea that they are supposed to be pleasant and try to please the customer. Also, finding a clean table seems to always be a problem also inside of a McDonald's. This is a huge problem for McDonald's with so many companies competing for the same customer in an industry that has little growth, customer service is one area in which you have to be strong. McDonald's is no longer going to be able to "steal" customers and increase market share if the customer service continues to be an issue and the "experience" for customers that have many choices doesn't improve dramatically.
Front #3: Increasing Competition - New Kids on McDonald's block
Lastly, I don't see a lot of catalysts for growth for McDonald's considering the competition for the consumer's dollar in the competitive dining out environment. In the realm of burgers alone you now have incredible competition that is slowly eroding McDonald's power as the place to go when you are craving a burger. Not only do you have the usual competitors such as Burger King and Wendy's and Carl's Jr.'s but now you can peek around the corner from McDonald's and you'll see a SmashBurger, a Larkburger and a Five Guys Burgers and Fries. One might argue that these are not McDonald's real competitors because of price and value but don't fool yourself. When you are waiting 5 deep in line to be serviced by an apathetic teenager and then you have to wait again for your order to be finished and sit at a dirty table....walking across the street to Smashburger for an extra few bucks suddenly might not seem like such a bad option. These new kids on the block are offering what many consider a better burger and pulling customers away from McDonald's.