By now, every one interested in McDonald's (MCD) would probably know that the stock has underperformed the market in a big way in 2012. The major indices are up between 5% and 10%, while MCD is down about 10%. A lot of us see this as a buying opportunity.
Worst In A Decade: Out of curiosity, we looked at MCD's performance in the first 6 months of the year (from the first trading day of the year till around June 18th of each year) over the past decade. Not so surprisingly, 2012 has seen MCDs worst performance (not including dividends) as shown in the table below.
Possible Reasons: So, what could have gone so wrong for MCD to produce its worst stock performance in over a decade ? A few possible reasons are given below.
- Could it be the consecutive reports of slowing same store sales growth ?
- Could it be the CEO Jim Skinner, the man credited with turning around MCD, stepping down after serving as the CEO since 2004 ?
- Could it be the Europe weakness ? Europe represents about 40% of MCD's operating income
- Could it be that the competition is catching up ?
- Or could it be the strong stock run in 2011 forcing people to take profits off the table ?
The Rebuttal: But are these reasons strong enough to warrant its worst performance in a decade ? Let us try rebutting these reasons, in the same order.
- Yes, the slowing sales growth could scare of new investors or people who are not really sure about MCDs prowess. Even through those so called "slowing" sales, MCD did post growing numbers.
- Yes, Mr. Skinner if often credited with turning it around. The stock performance speaks for itself since he took over; the stock has quadrupled since 2004. But with all due respect, running MCD is not the same as running, say, an innovation dependent technology company.
- Yes, possibly. But wasn't Europe as wobbly in 2011 as well, when the stock had one of its strongest runs ? And what about years like 2009 when the whole world was thought to be sinking ? MCD still did better than 2012. Or even worse, what about the early 2000s ? When U.S was recovering from crisis like the market crash and the 9/11 episode.
- Yes, YUM! Brands (YUM) and Wendy's (WEN) do have their fans out there (the restaurant as well as the stocks) but MCD is undoubtedly "the player" still. Take a look at this interesing report which says MCD wins not by winning each small market but by winning in more places than the competitors. Heard of "Lose the battle win the war" ?
- Yes, possible again. It is tempting to take profits and realize the gains. But if you look at the table above, you can see almost how except for one year, how the stock has gone up beautifully ? Also, one must not forget those growing dividends. Why would anyone want to quit a stock like this? If it goes up, well and good. If it doesn't go up, it pays you to wait till it goes up.
Conclusion: By now, if you are not clear about the message of this article, take advantage of any more weakness in this stock. For any of the stated reasons or a combination of them all, the MCD stock train has slowed down a bit. But the business seems to be as good as ever, if not better. Buy this juggernaut, monitor and reap the rewards. Ignore the short term noise and focus on the long term. Or taking a cue from MCD itself, lose the short term battle to win the long term war.
Disclosure: I am long MCD.