McDonald’s: Buy or Sell

Supporting the popular catch praise, “We love to make you smile”, investors of McDonald’s (MCD) may have different reactions to the drop that I foresee for this equity. With added competitors such as Jack in the Box, Burger King, and a broader enemy in the new fashion of going on diets, McDonald’s slowly will be feeling the pressures which it has repressed up to now. www mcdvoice com

Opening as an IPO in the late 1960s, McDonald’s has been known to be an incredibly valuable investment for those that caught into the craze early. Supporting a yield of nearly 1000% in its lifetime, McDonald’s, due to its large capitalization status and handsome dividends of 0.67, may seem like a stock continuing to be a safe long term investor. While there is a good sense that such a sentiment may be true, in reality with all the pressures McDonald’s has recently faced, continuing this ongoing upward trend, especially during times of economic downturn, will be an improbable task.

Typically McDonald’s does not figure to be known as a cyclical stock. Up until 2000, McDonald’s has avoided such tendencies to rise or fall during times of inflation or high unemployment, and with the exception of only a few fluctuations, McDonald’s has always had a strong and steady growth. However, these ideals seemed to change following the turning of the millennium as McDonald’s fell rapidly to a low of 15 points: an almost 75% downturn. Considering that this was the exact period where an economic downturn actively disrupted the market, I see the possibility of a close association between the price of McDonald’s and the current state of the US economy. Investors may make the argument that McDonald’s has a large percentage of revenues coming from foreign nations, but the truth remains with the fact that if the US economy suffers, the rest of the world tends to as well.

The reasoning for asserting such a sentiment about McDonald’s can be traced to the idea of consumer spending. Typically when Americans make more money when the economy is growing at a fast place, they tend to eat out more than they would if the economy was bad. The association, supported by unemployment and relative income levels, makes sense in the case of McDonald’s as any backdrop in potential customers may harm future guidance reports and overall earnings. McDonald’s, typically beating or matching expectations in terms of revenue or EPS, may find itself faltering over the next few quarters especially if the inevitable recession is a hard-landing. Both operating margins and revenue margins have slipped over the past few quarters, especially when compared to last year, and if it was not for a strengthening in investment activities, results from McDonald’s may have turned even worse.

While certain brokers tend to think of McDonald’s as a buy due to its large cap status at a point were these equities are favorably sought of, I tend to go against the norm in this case, believing that McDonald’s has entered a point of diminishing returns or diseconomies of scale which will have negative effects during the next few earnings’ results. While McDonald’s may rebound after this recession (pending how long), with increased competition from newcomers such as Chipotle and others, I would become a little hesitant of buying any shares for McDonald’s, especially during the next few months as an overbought stock.

 

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