3 Reasons Why It's Too Early To Buy McDonald's Shares (Or Any Restaurant Stock)

| About: McDonald's Corporation (MCD)

McDonald's Corporation (NYSE:MCD) shares were trading right around $100, earlier this year. However, a number of issues have caused the stock to fall to about $86 per share recently. While this might look like an attractive entry point for some investors, it could be a "value-trap", and the shares could either linger at current levels or even continue to drift lower. The company has been impacted by challenges which have not been resolved yet, and that is why it makes sense to stay on the sidelines and wait for more clarity and an even better buying opportunity. Here are some points for investors to consider:

1. McDonald's sales comparisons were weak in major markets like North America, Asia and Europe for the month of July. Even though this company provides value to consumers, the global economy is clearly taking a toll on the restaurant business and there does not appear to be a quick fix. Europe remains mired in a debt crisis, and many countries like Spain and Greece have unemployment levels of over 20%. Growth in China has recently weakened, and the economic data coming from the U.S. shows that a double-dip recession is becoming more of a possibility.

2. Due to a major drought in the Midwest, corn, soybeans, and other grain prices have surged over the past two months. Since May, corn has spiked about 45%, wheat is up about 32%, and other basics like soybeans and sugar are also up sharply. This poses a major threat to profit margins for many food companies and restaurants. It's important to note that corn is used as feed for chickens and cattle, so the cost of meat is expected to rise significantly as well. Corn syrup is also used in many drinks. Everything from beverages, to buns, to beef, is likely to jump in price and that could squeeze profit margins for many restaurants.

3. McDonald's recently reported weaker-than-expected earnings. For the second quarter of 2012, earnings dropped by about 4.5% to $1.35 billion, or $1.32 per share. Results were impacted by marketing promotions for the Olympic games, as well as the stronger dollar, which reduced profits from Europe and Asia. The consensus earnings estimate was for $1.37 per share in profits, so this was a 5--cent miss. That may not seem too bad, but it was the first time in at least four years that the company missed projections. Also, it's not just McDonald's that has disappointed investors with financial results recently. Chipotle Mexican Grill (NYSE:CMG) shares dropped by about 25% when the company reported weaker-than-expected revenue growth. When two of the best-managed and most popular restaurant chains are showing signs that results are being challenged by the economy, and other issues, it's another confirmation that this is probably not a short-term, single-quarter event.

Global economic weakness, rising food prices, and the declining value of the Euro and subsequent strength of the U.S. dollar remain major issues, and these challenging trends could last for a while. If these issues were only going to impact a single quarter, it would make sense to buy the recent dip, but these do not appear to be single-quarter issues, so it makes sense to wait for a potential drop in the very low $80 range.

Key Data Points For McDonald's Corporation From Yahoo Finance:

  • Current Share Price: $88.20
  • 52-Week Range: $83.65 to $102.22
  • Dividend: $2.80 per share which yields 3.1%
  • 2012 Earnings Estimate: $5.42 per share
  • 2013 Earnings Estimate: $5.96 per share
  • P/E Ratio: about 16 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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