McDonald's (MCD) is raising its dividend by 10% for the fourth quarter of the year, payable in early December. The stock continued to move up in early September because growth has been good in all regions. The U.S. was up 3.0%, Europe was up 3.1% and the hot spot-Asia was up 5.7%. It barely missed Street expectations of 3.89% coming in at 3.7%. But the stock continues to do well. Look at some of these key ratios I like looking at with companies:
- Since the stock underperformed compared to analyst expectations recently, it also had an affect on earnings as we did see a slight decline.
- Debt also appears to be under control as the current (debt to equity) ratio is a nice .97 and below the industry average, so management has done well keeping debt in check.
- ROE has improved a bit over the last quarter and shows the strength of the organization. And this holds up in the fact that the company is ahead of the industry and the S&P 500 (37.93 - 35.78 - 32.24).
- Its net profit margin of 19.7% is also above the industry average.
- Earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MCD increased its bottom line by earning $5.28 versus $4.58 in the prior year. This year, the market expects an improvement in earnings ($5.40 versus $5.28).
Does the company still have upside potential? Some analysts believe it can climb an additional (10% - 15%) and most of this may take place outside the U.S. The Trefis Team believes the fast food giant could comfortably add another 10,000 restaurants to its current store base over the long term and add 7,000 of those by 2019. Assuming the current franchise to company-owned mix remains at 80%, that would mean 5,600 new franchise restaurants and 1,400 new company owned restaurants by 2019.
When I observe the stock technically, I also believe there is still upside potential.
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Technically Speaking
McDonald's formed a double bottom through the summer and has been moving up out of it since early August. Presently it looks like it has reached a strong resistance level and has retreated. Is this the case or is it bouncing and will now push through? The pullback is understandable because the stock was oversold. The resistance level is the same point the stock reached in early July before it pulled back. The foundation it has established looks strong for another long term move up. The RSI indicator continues to follow the stock and looks healthy for a move up. The MACD also supports the RSI with the momentum favoring the bulls. I would not be surprised if the 50 day MA now becomes support.
The Options Play
With the stock presently trading at 92.51, I am looking at a bullish debit spread to add to my portfolio.
- Buy the December 2012 call with a strike of '92.50' (priced at $2.11)
- Sell the December 2012 call with a strike of '95.00' (priced at $1.03)
- Net Debit to Start: $1.08
- Maximum Profit: $1.42
- Maximum Risk: net debit
Maximum Length of Trade: 3 months
Reasoning behind the trade
- McDonald's is still showing strong fundamentals and technicals.
- The Asia region is growing well and will add to the number of stores and revenue.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
