McDonald’s ($MCD) announced today (9/17/18) that they are going to increase their quarterly dividend to $1.11, up $.10 from $1.01. This seems to be Ronald McDonald grasping for every straw to keep the stock price at a decent level.
McDonalds is trading ~11% below their 52-week high, and roughly ~7% above its 52-week low. While some may take this as a trend back towards growth, there are several factors at play that investors should be cautious of. Factors include:
- 3.7% sales decline over 5 trailing 5 years
- 11.5% sales decline in just the past quarter
- -6.55% performance of the stock Year To Date
- Stores and operators are plagued by discounts
- Increasing staff costs
How McDonalds can do a McTurnaround
One of biggest costs for any business is labor, and with significant increases in minimum wages, and the high number of bodies needed to process the order volume that McDonalds does, that number adds up quick. The $15 minimum wage will see a significantly higher staffing cost, and if McDonald’s isnt poised to offset or replace workers with technology, you could see quite a big dip in revenue.
Franchises have already started to cut front of house staff and replace them with order kiosks, capable of providing all the nutrition information, visuals for all menu items, and multiple forms of payment processing all in one neat little box. This should help streamline operations, but might not be enough.
Following Sonics lead
McDonalds has been slowly adapting new models to help increase same store sales, such as order ahead with curbside pickup, and a partnership with UberEats. These might help, but long term effects still remain to be seen. Sonic ($SONC) on the other hand, has seen 55% growth for the year, and is just 7% shy of its 52-week high. Sonic has adopted a mobile and text messaging first marketing campaign, driving traffic and same store sales up through the use of drink “happy hours” and regular loss leaders to increase store traffic.
Feeling McBearish on McDonalds
When analyzing the stock, looking at a 5 year Discounted Cash Flow Growth Exit, $MCD shows an almost 42% downside. Shorting $MCD is an option, and with a $93 price target, could make you significant money.
Buying 17 JAN 2020 $95 PUT options would see your entry price of $1.01. Ten contracts would cost $1,010, and breakevens at expiry would be $94. If the stock price tanks (like it has been trending towards), and hits $96 by 28 NOV 2019, we would see the value of the position of $3,750, and a total profit of $2,650 on the trade. Total return would be in the neighborhood of 250% return on investment (253% to be exact).
Looks like it might be time to McDouble down on some Put Options.