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Why McDonald's competitors are eating its lunch

Why McDonald's competitors are eating its lunch

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Even the Golden Arches are feeling the chill.

McDonald's February same-store sales data are in and, according to the company, bad weather is in part to blame for the 1.4% drop in US sales. They also cited "challenging industry dynamics" which covers everything from better alternatives elsewhere to customers not happy with McDonald's menu.

However, the US is only about one-third of the company's business. For McDonald's, Asia Pacific/Middle East/Africa – APMEA (not to be confused with apnea) – was also down 2.6% in February. For that, the company attributed weaker Japanese sales and "a shift in timing of Chinese New Year".
McDonald’s business problems over the past year are borne out in the charts, notes Talking Numbers

contributor Richard Ross, Global Technical Strategist at Auerbach Grayson. It moved below its 200-day back in January, a short-term negative indicator.

However, Ross sees a long-term positive trend when looking at an 11-year chart of McDonald’s.

“It’s been an outstanding performer,” says Ross about McDonald’s long-term move, particularly as since it has remained above the 150-week moving average. “We’ve held that level for over 10 years. That’s fantastic from a bullish standpoint. Each time we’ve tested it and held – that’s about five separate times by my count – we’ve rallied sharply.”

The stock is close to testing the 150-week moving average, currently around $93, according to Ross. “[The] short-term chart [is] not so great,” says Ross. “But the long-term chart looks rather compelling from my standpoint.”

John Stephenson, portfolio manager at First Asset Investment Management, sees McDonald’s as an expensive stock given that it trades 16 times this year’s estimated earnings.

“This stock is not a cheap stock,” says Stephenson. “That’ the first problem.”

Though the company’s European sales were the only ones that were up in February, Stephenson sees long-term problems for McDonald’s there because disinflation if not outright deflation is a potential threat.

“And then you’ve got a lack of catalysts,” says Stephenson. “All the long-hanging fruit – from corporate restructuring to recapitalization of the balance sheet – there are no real drivers going forward.”

That, in turn, will mean McDonald’s key metrics will be stagnant at best, according to Stephenson. “Whether it’s earnings per share growth or return on invested capital, none of those are ticking up. They’re all ticking sideways to down.”

“This is something better left alone,” says Stephenson of McDonald’s stock.

To see the full discussion on McDonald’s with Ross on the technicals and Stephenson on the fundamentals, watch the video above.

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