McDonald’s (MCD) just posted third-quarter earnings that were decent on the profits side but soft on revenue.
MCD investors should take this as yet another sign that the fast-food giant is weakening, and sell McDonald’s stock now.
The bottom line is that while McDonald’s stock has managed to keep profits moving higher, earnings continue to reveal serious growth problems on the sales front. This week McDonald’s earnings showed 2.4% increase in the top line for the third quarter, and that follows disappointing MCD earnings for the second quarter with an even less impressive 0.9% increase in revenue year-over-year.
The profit growth can’t keep up in the face of this trend. And while income investors are quick to point out that MCD pays a nice 3.4% dividend, keep in mind that McDonald’s stock only saw a 5% increase in its dividend payout this year — a sign that management may not be incredibly optimistic about future profit potential.
Now, there are plenty of excuses out there for those who want to be MCD bulls. The global economy is still soft broadly, and the dining business in specific is very susceptible to consumer pressures — and a even a mild uptick in consumer confidence could act as a tailwind. Also, currency exchange rates thanks to a strong dollar have acted as a mild deterrent to profits abroad.
And of course you there’s the 8% gain since January with a nice dividend… hardly anything to sneeze at if you’re a low-risk investor looking to the long-term, and not really worried about chasing risky momentum stocks like Tesla (TSLA).
But you don’t have to chase momentum darlings to find outperformance. Wendy’s (WEN) has been on a tear this year with 50% gains in 2013, and Burger King Worldwide (BKW) is up twice McDonald’s stock with a 16% gain.
However, investors would be wise to remember that big blue chip names are not guaranteed profit machines — and sometimes aren’t even guarantees of stability. There are many examples of blue chips moving sideways for several years, either because they reached maturity and don’t have a second act or because management hasn’t unlocked the proper potential from the market.
It’s too soon to tell whether McDonald’s stock is simply lagging the market this year or whether MCD is going to be stuck in a rut for the long-term. However, it’s prudent to start looking elsewhere after the recent top-line trouble in McDonald’s earnings.
After all, if the best you can hope for is to underperform the market by half… there are plenty of alternatives to McDonald’s out there that will get that done for you.
Related Reading on MCD
- McDonald’s recovers after post-earnings drop. (The Street)
- MCD to debut a tiered value menu. (InvestorPlace)
- McDonald’s also forecast a weak fourth quarter. (Reuters)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.