A couple of weeks ago I offered McDonald‘s (NYSE: $MCD) on a platter. I warned investors to act fast and scoop up these shares before they dropped off the value menu. McDonald’s stock (then) traded at $94.74, a mere 2.7% away from its 52-week low.
The argument was simple; It’s McDonald’s. The company isn’t going anywhere. With the Street fearful of the company’s near-term outlook, I saw it as a great opportunity to buy one of the best brands on the market.
Tuesday, the stock climbed almost 4%, its highest margin in more than two years, and Wednesday it is trading near $99, up 4.5% for the year to date. The main catalyst Chief Financial Officer Pete Bensen saying the company may look to cut costs and borrow more cash to return to shareholders.
[Become a Better Investor in 14 days: Click for Your Free Trial]
That’s all it took for investors to become believers once again.
But Bensen’s remarks, while affirming McDonald’s long-term commitment to value and to its shareholders, were the same things I’ve said over the past several quarters. The fear in McDonald’s weak same-store sales had been overblown.
As poorly as McDonald’s is said to have performed, it would surprise many to know that McDonald’s stock has actually advanced for the year to date. The company is beating the Standard & Poor’s 500 Restaurants Index, which has increased by .05%.
What’s more, it’s not as if the consumer sectors has been littered with high-flyers over the past couple of quarters. Both Nike (NYSE: $NKE) and Coca-Cola (NYSE: $KO) have been relative underperformers. As with McDonald’s both Coke and Nike performance is tied to ongoing sluggishness in China. Yum! Brands‘ (NYSE: $YUM) China struggles are well documented.
In the case of McDonald’s, margins have also taken a slight hit due to rising costs of beef. The hot-topic issue of the minimum wage increase is certain to prolong those fears. So Bensen’s affirmation regarding cost reduction arrived in time. But how much difference does it really make in the near and long term?
There was never any doubt that McDonald’s would figure it out or that management would come up with a plan. The company was crashing, as the recent talking points would lead you to believe. Making quick adjustments and adapting to new trends has been a part company’s rich history. With or without Tuesday’s announcement, McDonald’s was still a long-term hold in anyone’s portfolio.
Are there challenges? Of course there are. Management must figure out how to boost store traffic. It must figure this out in a world where consumers are becoming more health conscious. Chipotle Mexican Grill (NYSE: $CMG) is the perfect example of what is possible with some outside-the-box thinking. In that regard, McDonald’s, which invented the value menu, must return to its innovative ways and retool the merchandise.
The company will need to focus on new product introductions while also embracing the Starbucks (NASDAQ: $SBUX) model and place the consumer experience at the center of its service. This is one of the ways McDonald’s can boost traffic, while fighting (at the same time) fighting off the rising popularity of Chipotle.
For now, although same-store sales growth may not return for several more quarters, I’m going to continue to believe in this management team. With the company expecting to return $5 billion to shareholders this year, these shares have been “de-risked.” McDonald’s stock is still on the value menu, although you could have had these shares for $4 cheaper.