By Jonathan Chen
Investors are beginning to ask themselves: Is this the sign of a trend?
With shares down almost 3% this morning in early Friday trading, investors are certainly treating it that way.
The Oak Brook, Illinois-based company reported same-store-sales of 3.5%, well below the 4.3% that analysts were looking for. Breaking down the report, McDonald's saw extreme weakness in Asia/Pacific, Middle East and Africa, and much weaker than expected growth in America and Europe.
In the U.S., McDonald's had same-store-sales up 3.9% on estimates of 4%. Europe sales rose 2.7%, while analysts were looking for 4.7%. What is most starting is the 0.3% decline in Asia/Pacific, Middle East and Africa. Wall Street was expecting a rise of 3.5%.
"August marks our 100th consecutive month of global comparable sales growth, demonstrating the ongoing customer appeal of McDonald's great tasting food, offered at an outstanding value in our modern and convenient restaurants," said McDonald's Chief Executive Officer Jim Skinner.
McDonald's blamed the Asian decline on comparable sales in Japan. The company said that the March earthquake and tsunami are still affecting consumers spending habits.
In a weakened economy, McDonald's has been one of the beneficiaries, as consumers trade down from sit down restaurants, and into fast food names like McDonald's, Wendy's Co (WEN), Burger King Corp, and Yum Brands Inc's (YUM). The company said that Hurricane Irene had a minimal impact on McDonald's sales, despite hearing from casual restaurants earlier in the week that Hurricane Irene affected earnings.
With McDonald's missing same-store-sales twice in two months, this could be the start of a trend. McDonald's has been one of the better performing stocks this year, up 11% year-to-date. If McDonald's can no longer prove that it is dominating in the fast food space, then perhaps it is time to reassess the name.
McDonald's has had a run since the recession began in 2008, and has continued to outperform every metric since. At 15 times 2012 earnings, and sporting a 2.7% dividend yield, shares are not expensive. Yet, if earnings misses are going to be the norm, rather than the rarity, earnings estimates may come down for the Golden Arches.
My friend wearing big red shoes may turn into my enemy real soon. That fact, I'm not lovin' it.
Traders who believe that McDonald's miss is just temporary might want to consider the following trades:
- Traders might want to use today's ~3% dip to add or initiate a position in the name.
Traders who believe that McDonald's miss is a sign of things to come may consider alternate positions:
- Consider shorting MCD's if you believe this is a sign of things to come.
- Watch the other fast food companies, such as Wendy's, to see if they are taking market share from McDonald's. If there is a slight hint of market share being taken away, consider going long that specific name, and short McDonald's in a pairs trade.