Fast-food goliath McDonald's (MCD) reported weaker than expected same-store sales numbers for July. Comparable sales were flat year-over-year for the month, but fell 0.1% in the US, 0.6% in Europe and 1.5% in Asia/Pacific, Middle East and Africa. Expectations called for 2.2% growth.
Is this a sign McDonald's is done for? Not exactly. We expect cash flow generation will remain relatively stable thanks to the firm's franchise structure, allowing it to support future dividend growth. We also think the firm has plenty of strategies "in the bag" that it has yet to capitalize upon, including all-day breakfast - akin to competitor Jack in the Box (JACK).
However, new CEO Don Thompson didn't include the obvious in his press release: increased competition. Taco Bell (YUM) reported 13% same-store sales growth in the second quarter due to its value proposition and new product offerings. It also recently rolled out the Cantina menu. Additionally, Wendy's (WEN) has awoken from its slumber, creating new offerings like the Son of Baconator, improved salads, yogurt parfaits and The "W." That alone provides at least 5 new choices released in just the past few months. The newly-public Burger King (BKW) also returned to the scene. The restaurant now offers sweet potato fries, cheap ICEEs, Texas Style Whoppers and other new sandwiches. Altogether, there are now more reasons to visit other fast food chains, which have traditionally lagged McDonald's in innovations.
When McDonald's reported earnings, we identified $76 - the low-end of our fair value range, as an attractive entry point - and we continue to believe that to be the case. Europe and Asia are continuing to struggle with economic headwinds and US consumers have a lot of new menu choices to try. It's not time to throw in the towel regarding CEO Thompson or McDonald's but the stock looks weak technically, posting just a 4 on our Buying Index. However, its 3% annual dividend yield has room to grow and is an excellent option for dividend growth, in our view. We continue to contemplate adding shares to the portfolio in our Dividend Growth portfolio but will only do so if the valuation becomes more attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.