McDonald's: It's Just Not A Value Deal Until The Stock Hits $75

| About: McDonald's Corporation (MCD)

McDonald's Corporation (NYSE:MCD) shares have been in a downtrend ever since the company reported yet another disappointing quarter. The company recently announced the worst same-store sales growth in many years and blamed competition and a weak economy for the financial results.

For the third quarter of 2012, the company reported profits of $1.43 per share which was below earnings of $1.45 per share in the same quarter last year, and also below consensus estimates of $1.47 per share. Revenue barely budged, and came in at about $7.2 billion versus $7.17 billion in the third quarter of 2011.

While McDonald's has been reporting disappointing earnings for the past couple of quarters, other competitors have been serving up better results. For example, both Burger King (BKW) and Yum Brands (NYSE:YUM) recently reported better than expected earnings. In fact, McDonald's underperformance in 2012, has even led Mad Money's Jim Cramer to wonder if Burger King is taking away market share. Cramer said, "I don't care about the Burger King itself, but I know something's wrong at McDonald's because we've had multiple punk months.".

Regardless of which competitor is taking share, McDonald's does not appear to be on the "value menu" yet. The stock has dropped about 15% off the 52-week high, causing some investors to wonder if it is time to buy. However, the challenges facing this company do not appear to be going away any time soon. Europe remains deep in a debt and economic crisis, and the Eurozone is facing record high unemployment. Competitive pressures are also not likely to subside in the near future and rising food costs could continue to put pressure on profit margins. These issues and the potential for more earnings misses in the future could cause the price-to-earnings multiple to contract further in the coming weeks.

McDonald's shares are now trading less than a dollar away from the 52-week low. Stocks that are in a solid downtrend and close to the 52-week low often make new 52-week lows sooner or later. I expect McDonald's shares to do just that because even at current prices, the stock still trades at over 16 times earnings. The average stock in the S&P 500 Index now trades at about 14 times earnings.

A company that has missed earnings for the past couple of quarters hardly deserves to trade at a near 20% premium to the market. At an average multiple of 14, this stock would be worth about $75, and that is when I would consider it as a possible buying opportunity.

Key Data Points For McDonald's Corporation From Yahoo Finance:
Current Share Price: $86.80
52-Week Range: $85.92 to $102.22
Dividend: $3.08 per share which yields 3.6%
2012 Earnings Estimate: $5.32 per share
2013 Earnings Estimate: $5.82 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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.