Editor's note: This article has been updated from Thursday to include McDonald's sales report for July.
McDonald's (MCD) had a terrible sales month for July, saying same-store sales fell 2.5%. That included a 3.2% drop in the U.S., where it has more than 14,000 stores. But the worst area was the Asia-Pacific, Middle East and Africa, with comparable sales sinking 7.3%, largely because of a supply scandal in China that badly hurt sales there.
However, in the early going the stock was holding up quite well. In morning trading, it was down 22 cents to $93.09. It suggests traders essentially are giving the company a pass and viewing the China news as a setback that won't mean lasting damage to McDonald's reputation in the world's most populous nation. It also supports the idea that, in Wall Street's mind, the shares have gotten undervalued after falling from their all-time high earlier this year.
McDonald's does have major problems to solve for the years ahead, regarding its own operations, its menu, dining changes, a potentially costly labor ruling and competition. Still, if it stays relatively flat after such an awful monthly sales report, it's a sign that, right now, the stock may well have near-term strength, because compared with its average multiples, it's a bargain. That's even after the company noted its prior outlook for global comparable sales this year to be generally flat is now "at risk" of not being met.
Since trading at a record intraday high of $103.78 in May, the shares were down 10% as of Thursday's close at $93.31. From July 21, the day before the Big Mac seller last reported quarterly earnings, they had lost 4.3%. Another 1.2% decline, and they would be at the 52-week low.
After the downturn it's already had, McDonald's is trading at a discount to most of its five-year average multiples, according to FactSet data. Ratios for price to cash flow, sales and book value are all under their normal levels, as are enterprise value to sales and trailing price to earnings.
Meanwhile, another important measure, the forward P/E, has narrowed dramatically and now stands at 15.8, dropping it back to October's reading, compared with a current 15.7 average. At the end of the first quarter, the multiple was 16.1, which was 0.7 points above the 15.4 average at the time. As of mid-July, the difference had expanded to 1.1 points -- 16.7 vs. a 15.6 average. That's going to draw notice from Wall Street.
The price/earnings-to-growth ratio does remain an outlier at 2.2, matching a five-year high that exceeds the 1.7 average. Even so, enough metrics are suggesting the stock is "undervalued" that large buyers may well get interested here. Analysts have a consensus price target of $102.77 on the shares. While that would be a nearly 10% rise from the current level, an increase that might appear difficult to fully realize without a major change in McDonald's fortunes, it's not unthinkable. Considering all the factors, it won't be a surprise if traders decide they can't pass it up for a quick few dollars.
McDonald's shares have had many bright moments over the years, climbing from $12 in early 2003 to past $100 in 2011. Its unfailing dividend has added to investor returns and acted as an offset in depressed times for the stock. Lately though, it's been sluggish, down 4.8% in the past year and up only 6.6% in the last two. The Dow Jones Industrial Average, of which McDonald's is a component, has gained 5.6% and 24.2%, respectively, over those time frames. In the last year it's bettered only one name in the Dow, and over two years, it's the fifth-worst in the index as worries over its growth prospects and its numerous challenges have weighed on the stock.
On the surface, McDonald's doesn't seem to have a great deal truly to be concerned about. With 35,000 global stores, almost $90 billion in systemwide revenue and tens of millions of visitors daily, it's built itself into an enterprise that, absent an incomprehensible corporate catastrophe, will exist for decades. No other publicly traded fast-food chain has its scale, and even though its brand has detractors, the Golden Arches is as recognizable as any corporation that's ever been known. In America, its fries and burgers are a highway staple.
But real growth ahead is in question for the Oak Brook, Ill., fast-food chain, as it's been running up against ever-greater competition, changing demands among patrons, constant attacks on its food quality (or specifically, the lack thereof) and internal missteps with the menu. While overall sales are climbing slowly, this has more to do with new restaurants being built and price increases, as traffic to its stores actually has been falling. Comparable-store sales, universally viewed as a key indicator of restaurant and retail health, have stagnated, and in some months like July, been horrible.
McDonald's has dilemmas to resolve, which it might or it might not. If it does, the stock clearly benefits. If it doesn't, it retreats or stays flat. There are worse things in the market than having a place to preserve capital for safety, but for growth seekers, they'll have to look elsewhere, because McDonald's won't have it any time soon.
The last two years and the 52-week trading range of $92.22 to $103.78 illustrate how the market views the stock: It's got too many positives to crush, yet too many concerns to drive higher. Until this changes one way or the other, it's trapped. Regardless, the near term will probably favor the optimists. Because the market isn't likely to let McDonald's stay "cheap" for too long.