Why Is McDonald's Still Popular?

Summary

• While the stock has climbed this year, McDonald's revenues have not gained.
• The company has made moves in turnarounds, but they haven't increased the bottom line in a noticeable way.
• A pending deal to sell its franchises in Asia could create lower costs and a cash infusion, but to what end?

One of the very first things I wrote about on Seeking Alpha was McDonald's (NYSE:MCD). The burgernaught with the most delicious cardboard French fries in the world was down as revenues were in decline. I was skeptical of MCD then, and I still am now. Yes, the stock is back in the $100's, but the numbers are not showing growth, and some are losing patience.

I understand the loyalty people have for McDonald's. It's been a staple stock for a very long time. What I don't understand is the apparent disregard for the stagnant revenue that the company has displayed. Through 2016, we've seen lost revenues in both the 1st an 2nd quarters. In fact, revenues have been falling since 2011. One may counter this with the fact that MCD's earnings per share have thus far beaten last years. This is true, but it's mainly due to the fact that diluted shares outstanding have been pulled back in stock buybacks. It may make shares look better, but the company itself is not improving its appeal as a business.

Has the turnaround worked?

The company has been in a strategic turnaround plan for quite some time. Back in Q1 they reported a sales increase of more than 6%. Ironically actual revenues were down from the year prior. The excitement was short lived as expectations were not met in Q2. As I'm sure many of you have noticed, one of McDonald's bigger draws to lure in more customers was the "breakfast all day long" gimmick. As a fan of the egg McMuffin, it was a fantastic moment for me. While sales have grown, international net income fell by over 9% for that quarter. All day breakfast and the McPick 2 gimmick have brought in customers, but these enticements have failed to get customers buying other items. The egg McMuffin may be selling all day, but it doesn't seem to be making the growth that had been hoped for. The company itself acknowledged slowing growth within the industry. This in itself is going to antagonize plans initiated by the firm.

From what I can see, McDonald's is just shifting its sales around from things like double quarter pounders to McPick 2 deals and breakfast food. As for actually increasing business, revenues are down compared to last year so it hasn't helped sales in terms of returns. The stock is up over 25% this year, but long term debt has grown by more than 31% in a year. Between buybacks and restructuring, the cash position has also fallen to $3.13 billion.

In conjunction with expanding all day breakfast, the firm is working on a big sale of its franchises in the Asian market. Regardless of who ends up getting the deal, the business is said to be worth up to $3 billion. Mcdonald's also says it would save the company hundreds of millions in expenses. No doubt this deal would put some zip in the stock price, but to what end? In the long term, will partners be able to increase growth any more than McDonald's has? Competition is stiffer these days. It's not just names like Burger King and Wendy's (WEN). Chipotle (CMG), Quizno's, the magical Chick Filet A, even Five Guys Burgers and Fries, are all eating into what used to be a simpler market. Couple that with the diminishing restaurant sector and it's harder to see why McDonald's is up so much this year. The price to earnings is nothing special. The only real hook for the stock is the 3% dividend and "loyalty to the name".

Disclosure: I/we 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.