About 25 pounds ago I was a burger-eating son of a gun. I love them. I even have one named after me at a local place here in Chicago, “The Legendary Infamous FBD.” It’s got bleu cheese, grilled onions, bacon and a fried egg on a pretzel bun. Delicious. But that doesn’t mean I don’t enjoy a good run at some fast food. Among the nastiest of vices is the urge to gorge myself on McDonald’s (MCD – Analyst Report) Double Cheeseburgers with extra pickles.
Well, it finally happened. McDonald’s (MCD – Analyst Report) slipped to a Zacks #5 Rank Strong Sell. This is not surprising if you’ve been following the earnings estimate revisions (EER) for the past year where annual EPS projections have fallen roughly 15% for both this year and next.
In fact, during this steady decline in profit estimates by the three dozen Wall Street analysts covering the iconic fast-food behemoth, the stock has consistently been a Zacks #4 Rank Sell for the past two years since it was last a #5.
What’s Wrong with Ronald?
We don’t need to know the exact inner workings of McDonald’s operations to understand the profit evaporation. The beauty of the Zacks Rank as a quantitative tool is that it uses the collective calculations of the analysts who are all tweaking their models and estimates.
And from that collective modeling we get a clear earnings trend not just every quarter, but every time an analyst makes a tweak. Here’s what the path of those estimate revisions looks like over the past few years for the global leader in quick eats…
What’s amazing to me is that the stock has not done worse in the face of these declining estimates. But much of that may have to do with the 3% dividend this monster cash-generator pays out. MCD is a very stable part of many institutional portfolios for this reason.
Consumer Tastes and Healthier Choices
I have an anecdotal theory about McDonalds which may or may not withstand the scrutiny of the analysts. I offer it as a discussion point for investors who wonder if they should buy, sell, or hold any quick service or “fast-casual” dining stock.
I work in downtown Chicago and I have been continuously impressed for the past few years with the proliferation of new lunch options at my disposal. The choices of eateries keeps growing, across ethnic origins, locations, budgets, and the spectrum of “healthfulness.”
In any given month, I can eat lunch at over a dozen different places that offer delicious, affordable, and highly nutritious options. I can’t remember the last time I went to McDonald’s for lunch. I think it was sometime this year when I had a hankering for a Filet O’ Fish.
Bottom line: MCD investors may have been banking on growth in Emerging Markets to win the day for their stock. And that may still be the card to play because the tides of consumer tastes are definitely shifting here in the US.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.
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