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McDonald's: Where's The Beef?

J.G. Collins profile picture
J.G. Collins


  • MCD 2017 earnings were boosted by a $700 million accounting adjustment to reverse a prior write-down.
  • When that adjustment is reversed, MCD EPS has only increased by about 5.5 percent since 2013.
  • But the MCD stock price increase 70% from the release of the 2013 Form 10-K to the date of the Form 2017 Form 10-K.
  • Once one removes borrowings, stock repurchases, and other “one-shots,” cash flows from ongoing and continuing business operations actually fell by nearly 30% from 2013.

This article is written for INVESTORS, not traders.

Nearly 35 years after Wendy’s (WEN) and the lovable Clara Peller made famous the catch-phrase, “Where’s the beef?” in the American lexicon, shareholders of McDonald’s (NYSE:MCD) should be asking a similar question:

Where’s the CASH?

Investors have been told, repeatedly, by sell-side analysts that the burger giant was a good investment. Perhaps that was true, as the stock reached nearly $180 at the end of January. Or perhaps it was just another case of Wall Street bulls forming a herd and bidding up the stock well beyond its actual value.

Since January of this year, though, MCD has retreated, falling below the $150 mark early this month on the general market volatility and decline and on an analyst’s downgrade.

We’ve been down on McDonald's long-term prospects for over two years, since the end of January 2016 when shares were just around $120. And, yes, we’ve been hammered on that view with the stock run-up since then. But we generally have a longer timeline than traders, and McDonald’s most recently filed Form 10-K seems to justify our long-term negativity, particularly when compared to 2013.

Let’s look at some numbers: Since 2013, McDonald’s has doubled debt and reduced its book income by more than 40 percent.

Selected Form 10-K Stats

Note that book income does not take account of the $702 million "one-shot" accounting adjustment discussed below. SOURCE: EDGAR Interactive Data for 2017 and 2013.

On Clara’s “Where’s the cash?” point, we see that McDonald’s nominal cash flow has increased by more than 130% since 2013, but a closer look shows that, once one removes borrowings, stock repurchases, and other “one-shots” (like a loss on restaurant sales and proceeds from the sale of China), cash flows from ongoing and continuing "bread n' butter" business operations actually dropped by nearly 30%. McDonalds 2017

This article was written by

J.G. Collins profile picture
Before establishing The Stuyvesant Square Consultancy, J.G. Collins spent some 30 years building a career in executive and consulting financial roles, with a particular emphasis in business taxation. His experience spans work for Fortune 100 companies, one of the former “Big Eight” international accounting firms, and client service for large middle-market public accounting firms. He has advised domestic and foreign clients in the tax-efficient structuring of legal entities, effective tax rate planning, mergers and acquisitions, corporate reorganizations, treasury operations, financial instruments, international taxation, tax accounting under GAAP, state and local taxation, and sales and miscellaneous taxes. He has managed countless federal and state tax audits to successful resolutions for clients. His experience spans a diverse array of industries, including private equity, motion pictures and music entertainment, fashion, real estate, publishing, technology development, retail, and oil and gas. Mr. Collins conceived and branded the specialty industry entertainment practice of one of the nation’s leading accounting firms and oversaw the business tax marketing program for business enterprises of another large regional firm. Mr. Collins’ marketing collateral and published articles have been extraordinarily well received because of his ability to present intricate and complex aspects of tax, business, policy, and politics in clear, concise, easily understandable prose devoid of jargon and irrelevant detail. An astute, data-driven observer of business, politics and economics, Mr. Collins has advised political candidates and public officials on campaign, political and policy matters for more than two decades, and has twice been a delegate to his political party’s national quadrennial convention to nominate the American president. His expertise as a champion debater and orator in his student days, along with his savvy marketing expertise, has allowed Mr. Collins to coach private and public sector executives and candidates on public speaking, speech writing, message development and successful business presentations. Campaign collateral he developed for political campaigns has been used in university courses as an “excellent example of persuasive campaign advertising”. Mr. Collins holds degrees in Economics and Accounting from the Stern School of Business, New York University. His elective coursework included a number of political science courses, including International Politics, International Organizations, European Politics and other more basic political science courses.

Analyst’s 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.

The foregoing is only the author's opinion about a company and its operations, market, and management. It is not intended as investment advice, and you should not use it for that purpose. You should consult your own personal financial adviser before undertaking any changes to your investment portfolio.

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Comments (109)

J.G. Collins profile picture
Given the horrible way that the McDonald's C-Suite treated Big Mac innovator Jim Delligatti, it seems the EU -- and Burger King -- have finally delivered some well-deserved payback.

RIP, Jim Delligatti (1918-2016)


PendragonY profile picture
Except for the stubborn fact that MCD isn't dying.
J.G. Collins profile picture
How long can you keep distributing 150%+ of earnings from operations?
PendragonY profile picture
Um, they had about $2.4 (almost 2.5) billion in CFFO last quarter and paid out less than $800 million in dividends.
money$matters profile picture
Excellent analysis. Thank you!
J.G. Collins profile picture
You're welcome. Thank you for your comment.
Briannicus profile picture
Where’s the beef? My question is, where’s the beer? If MCD wants to change the fast food paradigm in the United States, they should add some menu items from their German subsidiary...
PendragonY profile picture
Selling alcoholic beverages in the US actually requires quite a bit of personnel and infrastructure.
J.G. Collins profile picture
It's one of the reasons we like Shake Shack over the long-term. They do a beer and wine menu. Just noticed, too, that they use gluten-free buns (except in stadiums.)

I hope to sample the breakfast menu at one of their transit locations this week for an article we're compiling.
somedata1 profile picture
I'll be scaling 140/share for MCD. McDonald's is a buy and hold forever stock.
J.G. Collins profile picture
That's what people said about GE, too.
PendragonY profile picture
Since the author likes to exclude what he calls one-offs, I am surprised he missed this statement from the press release:

"Full-year diluted earnings per share of $6.37 increased 17% (17% in constant currencies). Included in full-year results are:
approximately $700 million, or $0.82 per share, of net tax cost associated with the Tax Act; and
a pre-tax gain of approximately $850 million on the sale of the Company's businesses in China and Hong Kong, offset in part by $150 million of current year restructuring and impairment charges in connection with the Company's global G&A and refranchising initiatives, for a net benefit of $0.53 per share.

Excluding the above items, as well as the $342 million or $0.28 per share of prior year strategic charges, full year net income was $5.4 billion, an increase of 10% (10% in constant currencies), and diluted earnings per share was $6.66, an increase of 16% (16% in constant currencies)."

So in fact excluding ALL of the one offs actually results in MCD having full year earnings of $5.4 billion and not $4.7 billion.

J.G. Collins profile picture
So, ignoring your "analysis" - (and I'm sick of discussing the absurd notion that a sale of China is something other than a "one-shot""), in other words, net income of $5.4 billion IS less than 2013 net income of $5.6 billion.

Thank you for confirming what I have been saying all along. #FailingBrand

PendragonY profile picture
You are the one making a claim that MCD is in a bad spot. And that they are declining rapidly. And even when you look at a peak year, the decline is smaller than you state. Your prime claim is based on calling a bunch of income as one-offs so you can ignore it, but even then, you have to make a comparison to a peak year. And ignore the per share figures. And ignore the increased store traffic and increased average ticket. Not a failed brand at all.
J.G. Collins profile picture

2011 $5.5 Billion
2012 $5.5 "
2013 $5.6 "
2014 $4.8 "
2015 $4.5 "
2016 $4.7 "
2017 $5.1 boosted by an $850 million one-shot, so $4.25 billion.

How do you define "peak year"??? Anything before Easterbrook took the reins in 2015???

And that's WITH All Day Breakfast, cost-cutting, and all the rest of Easterbrook's dancing. (Truth is: Thompson spoke of ADB, technology, and delivery before he retired.)

Declining, failing, brand. As much a part of American culture as 3 network channels, 99 cent gasoline, rotary dials and cigarette machines.
I agree mcdonalds cant go any higher. What other new food items can they bring? They already did all day breakfast and coffee really well and that is what got them from 13 a share in 2002 to thier current price. But how else can they grow? I also think mcdonalds will decine alot in popularity in the US in the next decades. Overseas mcdonalds will still do well but not enough to propel the stock into a very good investment.
PendragonY profile picture
Dejas vous all over again. People have been saying that for a very long time. And yet, look where we are now.
autofocus111 profile picture
@hsh "What other new food items can they bring?"

MCD18+ now serving alcoholic beverages?
J.G. Collins profile picture
I think their best option is a merchant banking model to bring their franchising, marketing, real estate, and branding expertise to a whole bunch of local food alternatives (Spiedie sandwiches, in Central NY; Vietnamese; Indian, Tappas, BBQ, etc.) and bringing them out regionally or nationally (which is what they did with Chipotle several years ago, before they decided they wanted to be "a modern, progressive, burger company" (whatever that is.)

I can walk around the East Village in NYC or any number of roadside diners around the country and find new kinds of food that Americans would really enjoy, were it readily available. There's an Indian chain that's just fantastic we tried recently and there's a Mexican place (near the "Ground Zero" Chipotle associated with the Boston College Norovirus outbreak) that's excellent.

Who ever heard of Taco Bell 40 years ago?

They could also do the REIT thing, but they supposedly ruled that out a number of years ago.
autofocus111 profile picture
"Experience The Future" at MCD

>>>Workers are walking rather than dealing with new technologies and menu options. The result: customers will wait longer. Already, drive-through times at McDonald’s slowed to 239 seconds last year — more than 30 seconds slower than in 2016, according to QSR magazine.

J. G. thanks for the article. Looking at the P&L what jumps out at me is a tax rate close to 40%. MCD of course is international, but where do you see the tax bill going in 2018 and its impact on EPS?
J.G. Collins profile picture
If you look at their tax provision, most of that boost in the effective rate boost came from the transition tax from the new tax act, so it's a one-time hit. Offset that with the revaluation of deferred tax liabilities (another one-time adjustment from the new tax act) and you're down to a more traditional 31 to 32 percent effective rate.

McDonald's has some European tax issues that I believe are still on the table after it scrapped its Luxembourg structure and moved it over to the UK. There may still be some inter-company pricing issues on the table as well. These are the same tax matters

We have a guy looking into the European tax issues and some other issues they have in Europe, and will report them, probably in the 2018 Q1 report.

This tabloid story also broke the other day so we'll see what comes of it. I could see some big-time regulatory issues coming out of it there and here, if the story is true. You can't lie to your customers and expect the authorities are going to give you a pass. http://bit.ly/2Gnstuo
PendragonY profile picture
I suppose its pretty easy to think MCD isn't doing well if every time they do you just claim its a one-off.
Pablo Kelly profile picture
Mr. Collins,
Thank you for your article.
While I have no MCD, it has been on my list. I still like the product, but the increased debt and the special income adjustments give me a basis for reconsideration. Indeed, the industry has few real barriers to entry on a regional basis. You can get a lot of food for $5.
Tough business.
J.G. Collins profile picture
You're welcome. We're just very wary of the company; just not sure they have a plan to grow earnings and we've seen a lot of financial engineering. For now, "growth" looks like 3,000 new restaurants. Two quarters ago, it was Signature Crafted Sandwiches and transitioning from "fast food" to "fast casual". Now they're back to the Dollar Menu. Next up is Fresh Beef.

It seems they're doing the "Spaghetti Strategy": throw it at the public and see if it sticks. Not the best way to grow earnings in our view.

Another J.G. buy signal! Thanks again.
riddix profile picture
You're not getting my shares bud.
J.G. Collins profile picture
I don't want 'em. Kind of like owning Howard Johnson's circa 1973.
He’s back with more bad advise been wrong since low 80s where I bought
J.G. Collins profile picture
Oh, C'mon "Correct" - you can at least try to live up to your moniker.

My first McDonald's article here was written in late January, 2016 when the share price was around $120. (And by the end of the next month, MCD was down 3.5 percent, but who's counting?)

I don't mind the hits (took a lot of it when we called BS on the Chipotle cult, too). But at least get your facts "Correct"
The only facts I care about is I bought at 84 and then sold half in the 160’s I’d call that correct
PendragonY profile picture

In your first article you claimed that long terms earnings growth was unlikely. And yet in every quarter since then, there has been earnings growth. How is that right?
And yet every time I drive by one of their restaurants, the parking lot seems to be full.

Just saying....
Ziggy888 profile picture
another author that does not eat his own cooking. Anyone who filled your prior advise are much poorer for it and you try to justify your prior poor advice by stating you have a long term view. Remember - in the long term - we all die!
J.G. Collins profile picture
Been doing long-term for most of our stuff. No longer required in our author inputs, but we mostly write for investors and on a four to seven year timeline.

For MCD, we never anticipated how reckless MCD would be in leveraging its balance sheet (to the point its bond rating was down-graded.)
Bim Ska La Bim profile picture
Sold a small amount @ $160...but the chunk I bought at $89-$90 will pay me and pay me...

As an anecdotal, biased reference, I like to look at the lines as I drive past various establishments...of the 10 or so I checked on the way down to Spring Training, business was brisk...
These CEO’s are financial engineers with all that stocks buyback we should focus on the company revenue and earning instead of using the eps . EPS is a very deceptive tool to evaluate any stock with a huge stocks buyback. This applies to all the stocks that’s going to take advantage of the tax cuts to buyback its shares and posting its EPS
The beef is as thin as the cheese slice!
That's why they have $1 menu.
Buyandhold 2012 profile picture

The adjusted closing price for McDonald's on April 1, 1980 was one cent a share.

It is now 157.24 a share.

An investor would not have been a fool to invest in McDonald's on April Fool's Day in 1980.

The stock is worth 15,724 times what it was worth on that day.

Meaning that a $10,000 investment in McDonald's on April Fool's Day in 1980, with reinvested dividends, would now be worth $157,240,000.

Do I think that McDonald's will fall to 85 to 95 dollars per share in the next five years? Probably not. But if the price ever did fall to 85, I would back up the truck to buy shares.
J.G. Collins profile picture
As the prospectuses (that is the word for more than one, no?) ""Past performance is no guarantee of future results."

McDonald's use to run a real estate company supported by the sale of hamburgers.

Now, it runs a financial engineering company.
Multiple expansion has been a big part of the current bull market, and McDonald's is no different. Staying in stocks without multiple expansion, i.e. owning only stocks that rose based on EPS increases alone, would've been a simple easy way to under perform the index. What you say is probably true, and at some point in the next few years MCD's multiple will come back down via price decline. It's also an incomplete explanation and a great way to underperform. Until a general economic decline or bear market emerges (not this little correction in February), long MCD.
J.G. Collins profile picture
As Buffet (Warren, not Jimmy) likes to say, "You have to wait for the tide to go out before you can see who's swimming naked."

I used to understand McDonald's based on earnings and share value. And while I understand what it's doing nowadays, I don't think its a viable business any more over the long term. It's business pretty much stopped after All Day Breakfast was rolled out.
And investors say . . . . . Where’s the investment returns on McDonalds?

In your case, in that bright red dumpster.
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