Soft Comps at McDonalds Put These ETFs in Focus

Zacks

It seems that McDonald’s Corp. (MCD) needs to do a lot more to regain its lost ground in the global restaurant industry. The world’s biggest burger chain has been faltering due to a fragile macro economy, changing eating habits, and cutthroat competition.  
 
Basically, the company has become vulnerable to macroeconomic headwinds like intense competition in the U.S. and decelerating growth in Asia. Although the debt debacle in Europe has begun to ease, as evident from McDonald’s bullish run in comps in that market, the zone is still not out of the woods. The company expects comps to remain under pressure in the coming quarter as well.
 
November Comps in Focus

Most recently, the hamburger behemoth has come up with its same-store sales (comps) results for November. Comps nudged up 0.5% in the month under review, down from 2.4% growth recorded in the year-ago month. Comps were also flat sequentially.
 
What caught the attention in the recent results was the sudden underperformance in the U.S. segment that was otherwise well-positioned so far. Comps in the U.S. fell 0.8% as against the 0.3% growth expected by the analysts.
 
Also, the Asia-Pacific region continued its long-stretching sluggish run. The only ray of hope lay with comps in Europe which expanded 1.9%, up year-over-year as well as sequentially.  
 
Should You Pick MCD for Your Portfolio?
 
The underlying growth drivers of the restaurant industry remain intact. This can further be validated by the impressive Restaurant Performance Index (RPI) that climbed to a four-month high in October.
 
Pent-up demand in the sector is high, promising long-term earnings growth for the sector. Commodity costs are also cooling off in major geographic regions, thus helping out the margin profile of the restaurateurs (read: Which Sector will Outperform in Q4?).
 
In such a scenario, McDonald’s just needs to reposition itself. Despite recent operational woes, we still believe that the company has strong value. McDonald’s has historically enjoyed moderate growth prospects. And investors should note that McDonald’s is an intriguing dividend play. As of December 9th, its dividend yield stood at 3.30%.  
 
Market and ETF Impact
 
Following the comps announcement, McDonald’s share prices fell 1.12% in a single trading session on December 9th. McDonald’s has decent exposure in funds like Consumer Discretionary Select Sector SPDR Fund (XLY) and Vanguard Consumer Discretionary ETF (VCR).
 
XLY and VCR slipped marginally 0.08% and 0.06% respectively in MCD’s key session. However, the duo has a top Zacks ETF Rank of ‘2’ with ‘medium risk’ outlook and could be interesting picks for investors. Thus, investors might consider buying the products on the recent dip (see all the Top Ranked ETFs here).
 
XLY in Focus
 
XLY is by far the largest product in the consumer discretionary space with more than $7.0 billion of assets. In its 85-stocks portfolio, the in-focus McDonald’s takes up the fifth spot with 4.81% allocation.

The ETF charges a meager 18 bps in fees a year and pays a dividend yield of 1.26%. The fund returned 37.2% in the year-to-date time frame (as of December 9, 2013).
 
VCR in Focus
 
This one is the third largest fund in the space with about $1.3 billion in AUM invested in 371 stocks. Here also, MCD takes up the fifth position with 3.8% of assets. The fund surged a handsome 39% in the year-to-date time frame. VCR is a cheaper fund, charging only 0.14% of expense ratio while returning 1.09% in the form of yield.
 
Conclusion
 
While things are yet to look up for this iconic brand McDonald’s, the chain is resorting to various sales-driven initiatives lately to stay competitive. This might help MCD turn around next year. Also, with a slew of economic good news and improved consumer confidence, people might be willing to spend more.
 
Amid such a backdrop, the two funds mentioned above may be worth considering thanks to their slightly low valuation at the current level, as well as their decent outlooks—and ranks—for the coming months (read: Is This ETF a Better Bet in the Consumer Space?).
 
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