Unpopular Opinion: McDonald's Is Overrated
Burger flipper McDonald's reported that July same-store sales rose 1.6% in the U.S., with a 0.7% increase globally, keeping the stock near the $100 mark, a tight range it has traveled in for the past few months. The question weighing on investors' minds right now is whether it can shed or at least mask its image as a fast-food joint while maintaining its place for value-conscious diners.
There's little question the fast-casual market popularized and dominated by Panera Bread and Chipotle Mexican Grill is the sweet spot of dining these days. Panera sales have grown at a 14% compounded annual growth rate over the past five years, with operating profits jumping 27% annually, while Chipotle's done even better, expanding revenues 20% over the same time period and growing earnings at a 30% clip.
Those kinds of numbers are leading other fast-food concepts to reimagine their restaurants and go upscale. Yum! Brands , for example, cleaned house by upgrading its Taco Bell chain by bringing in celebrity chef Lorena Garcia to spice up its menu. It's also installing lounges and most recently retired the iconic Colonel Sanders from its KFC chicken chain while emphasizing a new menu that features flatbread sandwiches, fresh salads, and a more relaxed atmosphere.
The sit back-and-relax atmosphere follows the path Wendy's took last year to jump on the fast-casual coattails when both it and Burger King installed the lounge-style seating that's common at Panera.
McDonald's hasn't jumped in with both feet like that just yet. There's a knife's edge it has to walk to maintain the value proposition for its customers, but it has also begun offering new menu items such as chicken wraps and egg whites for its sandwiches. Still, the dollar menu remains a prominent fixture of its marketing, but in difficult economic times, it will continue to pressure the chain's margins.
At nearly $100 a share, the stock is trading at 3.5 times sales, which is a steep premium to Yum! at 2.5 times, Panera at 2.2, and Sonic at 1.6. Chipotle, on the other hand, goes off at more than four times sales, making it perhaps another overvalued stock even if it's where diners want to pull up their chairs at the moment.
McDonald's finds itself in the position of deciding whether to be fish or fowl. Walking with a foot in both camps will probably meet with the same sort of failures the chain had when it attempted to go healthy in the past (McLean Deluxe, anyone?). Right now, it probably got as much of a boost from reintroducing the Monopoly game as anything else, because Europe is weak, as is the Asia/Pacific region, the Middle East, and Africa.
With even management predicting the rest of the year to remain challenging, as much as I like an investment in McDonald's for the long term, I think we'll be able to get a better price for it sooner rather than later, and I'd wait for that opportunity before buying in.
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The article Unpopular Opinion: McDonald's Is Overrated originally appeared on Fool.com.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, McDonald's, and Panera Bread and owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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