The slowdown in share-price growth for the nation's restaurants has continued at the midpoint of the second quarter, but a few names have forged ahead, none perhaps more notable than McDonald's (MCD).
Despite monthly and quarterly numbers that have hardly been impressive overall, struggles with competition, tepid sales improvements and ongoing pressure from health food supporters and labor activists calling for higher wages (including strikes this week), McDonald's stock is turning in a nice 2014. Even with its lack of business perfection, shares this week set an all-time intraday high of $103.78, surpassing by 8 cents the record of last April.
It's not the best of the restaurant stocks, and it's not the leader in the Dow Jones Industrial Average. However, since the close of trading Dec. 31, McDonald's has gained 5.5%, while the Dow is slightly negative. The shares have also outpaced the broad market measured by the S&P 500, which has added 2.2%. Against the average restaurant, it's even better, as 42 stocks surveyed by Yahoo Finance have lost an average of 3.7% over the past four and half months. At March 31, the group's drop was 2.6%, compared with a 1.6% gain for the S&P, so the divergence between the industry and the market is becoming more pronounced.
That marks a break from the past few years. Restaurants were better than the S&P every year from 2008 through 2012 by a considerable margin, and in 2013, the difference was almost 25 percentage points — restaurants surged 54.1% vs. the market's 29.6% climb. McDonald's was one of the disappointments, relatively speaking, ending the year up 10%.
With the decrease in the stocks, they're getting a bit closer to their average earnings multiples, though they still have more room to decline to truly normalize. The five-year average for the stocks is about 22, but after last year's run-up, they had gotten past 27. These days, the set has a 24.6 forward price-to-earnings ratio.
Among the group's names this year, McDonald's is one of 12 restaurants tracked that are positive. In 2013, only three of the 40 that traded for the entire year declined.
In the first quarter, McDonald's tacked on 1.9%. But from its March 31 close to the high on Wednesday, it had risen another 5.9%, suggesting renewed interest from institutional shareholders. Based on FactSet data, large owners were favoring sales of McDonald's stock in the first quarter, in terms of the net position change. Its top three investors, which included Vanguard Group and BlackRock Fund Advisors, reduced their stakes. Investors will know for sure in a few more weeks when ownership holdings are disclosed, but the uptick in the stock of late certainly points to a reversal in Wall Street's thinking.
But how long can that last? McDonald's has gotten on the pricey side as it's strengthened, with a forward multiple of 17.2, up from 16.1 at the end of March and above the 15.6 five-year average. Its high in the past half-decade is 17.8. Using the next 12 months' projected earnings, at a new peak of 17.9, the stock would be trading at $105.25. Meanwhile, its price/earnings-to-growth ratio already has matched its five-year best, getting to 2.2 and easily surpassing the 1.7 average.
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At least some traders may well be starting to get cautious. Analysts aren't yet, having an average price target on the stock of $106.25. One this week went to $120. That said, as the market has been shaken in the past couple of days, McDonald's has stepped back. Lately, it was at $102.33.
McDonald's, of course, isn't a growth stock, and there's clearly no guarantee it continues up from here — sector favorite Chipotle (CMG), for instance, got to a record high this year but has fallen off sharply since. McDonald's, though, does have a few things on its side. It pays a regular dividend, with a yield of 3.1%, which adds to price gains or mitigates losses. Its restaurants are everywhere, and they're fairly cheap with generally consistent food, meaning investors can count on it for sales even in troubled times for the economy. So if consumers become more concerned about spending, McDonald's might be viewed as a better place to park some investment cash for a few months than, say, Cheesecake Factory (CAKE).
The company is taking steps to boost sales and in turn, its stock, such as simplifying a menu that had become crowded and undergoing a kitchen restructuring that's meant to improve order times and customization. If investors like the progress, then perhaps it does manage to get that richer-than-usual multiple. But it won't be easy.
- Consumer Discretionary