Why I’m shorting McDonald’s

 

It seems almost impossible to imagine that a company the size of McDonald’s could in fact, vanish…or is it?

First though, some disclaimers.

  • I’m a fast food eater. I grew up with McDonald’s in my life, but my parents recognized the value of balance, and so eating at McDee’s was a ‘sometimes’ treat, not an ‘everyday’ treat.
  • I’m not a born-again vegan with a raging hard-on against the satanic fast food industry and a single-minded desire to change everyone’s eating habits; I still eat the occasional fast food, but some time ago, McDonald’s ceased being my go-to choice.
  • I’m normally just a charts guy. But every once in a while, a story appears that catches my interest on a few levels, so I start to look a little deeper.
  • I could be totally, completely, utterly wrong here. Which is why I use stops, but more on that in a minute.

McDonald’s has been on my radar for a while now, but what finally nudged me over the edge to get into the trade was seeing one of their new TV commercials last night. It was for some wrap thingy (maybe only available here in Canada, who knows), but the 30 second spot screamed of a company frantically trying to reinvent itself. The product looked odd, which is not an appealing quality, and certainly didn’t leave me wanting to try it.

Case #1. The numbers:

Now, I’m not going to painstakingly break down the latest $MCD earnings numbers for you here. There are enough people out there doing that already, and doing a far better job of it than I ever could, at that. McDonald’s reported for the quarter on the 22nd, and it missed on both earnings ($1.40 versus $1.44 estimated) and revenue ($7.18 billion versus $7.29 billion). It’s feeling the pressure of lower sales in both the US and Europe, and perhaps most disturbing, it’s offering little in the way of positive guidance for the remainder of the the year. And this is not a new development: the company has struggled with theirĀ  numbers since 2012. One gets the impression that every quarter the board probably feels like a grade 8 student schlepping home with a poor report card, bracing for that conversation with the parental units. The company is facing increased pressure from, quite frankly, better tasting competitors. Those competitors include Chipotle Mexican Grill, which interestingly, McDonald’s once owned 90% of; “once owned” being the key phase there. D’oh! Which brings us to…

Case #2. The food:

Consumer Reports latest food survey had McDonald’s burgers rated 21. Out of 21. So, last, basically.

http://static3.consumerreportscdn.org/content/dam/cro/magazine-articles/2014/August/CRM_Consumer_Reports_Taste_Champs2_08-14.jpg

That’s not good. At the end of the day, even if it’s fast food, people want to at least enjoy the indulgence. And clearly McDonalds isn’t delivering.

What more is there to say?

Case #3. The chart:

(click to enlarge)

MCD July 2014

$MCD has had an undeniably strong run since 2003, as this weekly chart shows. But that trend seems to be wavering. The double top that formed with the peaks of April 2013 and May 2014 is easy to see. While that strong uptrend hasn’t yet been broken, it is weakening. With the double top comes an obvious stop loss point – a break above that would nullify this short idea.

There are clearly cracks in the armor of this monster company. Calling for it to vanish completely sounds a bit silly, until you start to ponder the larger question, which is: Is this a business that would get off the ground if it were started today? I think the answer to that is no. And the problem is, despite their attempts to reinvent themselves, they are still McDonald’s. Brand recognition is a powerful thing, but in this case, that may not be a good thing.

I’ll leave you with one final thought. Sometimes big companies do in fact just go the way of Blockbuster (see, there’s an example right there). Remember Compaq? MCI WorldCom? How about Arthur Andersen, a company that ran from 1913 to 2002, and employed over 80,000 people?

Think McDonald’s couldn’t just vanish? Ask yourself if your life would even skip a beat if it did. Would anyone’s?

 

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