McDonald’s Corp., three years into a dramatic turnaround effort, has left investors hungry for more.
Though the company matched Wall Street estimates for U.S. comparable sales growth last quarter, the shares fell the most in more than four months -- a sign the bar has been raised for the fast-food giant.
After kicking off a rally in 2015, McDonald’s now carries a rich valuation compared with its peers, Bloomberg Intelligence analyst Mike Halen said. Investors also have grown accustomed to seeing McDonald’s beat estimates, rather than merely matching them. The last time the company didn’t exceed U.S. comparable sales projections was July 2016.
“Momentum slowed a little bit in the fourth quarter on a two-year basis,” he said. “The stock is down because it’s been on an absolute tear. Stocks don’t go up forever.”
McDonald’s U.S. strategy also has increasingly become a race to the bottom. The world’s largest restaurant chain relied more heavily on discounting to maintain sales in its latest quarter. The Oak Brook, Illinois-based company has touted drink specials and sandwich promotions, and more recently revamped its Dollar Menu. That program, which offers items for $1, $2 and $3, is showing early signs of attracting more customers.
The question now is how long McDonald’s can fuel growth by appealing to Americans’ penny-pinching instincts -- especially as competitors fight back. Taco Bell and other rivals are rolling out their own items for as little as $1, making the fast-food industry even more cutthroat.
“There’s a lot of expectations out of this $1, $2 and $3 value menu,” said Edward Jones analyst Brian Yarbrough. “And if that doesn’t perform, you could see more weakness in the shares.”
Stock Rally
The stock had been up 3.3% this year through Monday’s (January 29) close. It gained in each of the three previous years, fueled by Chief Executive Officer Steve Easterbrook’s comeback bid. But on Tuesday (January 30), the shares fell as much as 3.4% to $171.70, marking the biggest intraday drop since September.
The Golden Arches are still outshining most of the restaurant industry. Last quarter, U.S. comparable sales climbed 4.5 percent -- a result most chains would envy.
Globally, McDonald’s exceeded estimates. Its lead international markets -- a category that includes the U.K. and Canada -- gained 6% on that basis, compared with a 5% prediction. Overall, the sales climbed 5.5%, beating the 5& projection.
McDonald’s profit also handily beat analysts’ estimates. Excluding some items, earnings came in at $1.71 a share, compared with the $1.59 estimate.
Easterbrook believes the company can stay on track by touting convenience, menu variety and affordable prices. He’s also betting that a new mobile app and the rollout of delivery service can keep customers loyal.
“We are confident that we will accelerate our momentum by capitalizing on our strong business model,” he said in a statement.
News by Bloomberg, edited by Hospitality Ireland
