Dow component McDonald's Corporation (MCD) has fallen out of favor after posting an all-time high in October and could sell off to $180 in coming weeks. The second pandemic wave and slow vaccine rollout are having major impacts on revenue, especially in France, Germany, Italy, and Spain. While global comparative sales have improved sequentially since the second quarter, guest counts remained negative across all segments in the latest reporting period.
- McDonald's missed fourth quarter earnings and revenue estimates on Thursday morning.
- Negative international comparative sales cancelled out a decent quarter in the United States.
- The stock failed a breakout in October and could now sell off toward $180.
- A first quarter decline could mark a low-risk buying opportunity.
Failure to Capitalize
Mickey D. reported fourth quarter 2020 earnings on Thursday morning, posting a profit of $1.70 per share, missing estimates by $0.07. Revenue fell 2.1% year over year to $5.31 billion, lower than $5.35 billion expectations. Both metrics failed to capitalize on the third quarter improvement, when folks around the world were enjoying a respite from high infection rates. That changed in the fourth quarter, forcing millions to resume lockdowns and/or social distancing measures.
Wall Street consensus on McDonald's is looking ahead to better times, maintaining an "Overweight" rating based upon 25 "Buy," three "Overweight," and eight "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $209 to a Street-high $273, while the stock closed Thursday's session $2 below the low target. Skeptical sentiment underlies this disconnect, with individual investors worried that the 2021 economic recovery will unfold more slowly than expected.
Comparable store sales refer to the revenue generated by a retail location in the most recent accounting period relative to the revenue it generated in a similar period in the past. Comparable store sales, or "comps," are also referred to as "same-store sales" or "identical-store sales."
McDonald's Monthly Chart (2008–2021)
A recovery wave after the 2008 low stalled just above $100 at the start of 2012, yielding a trading range that posted failed breakout attempts in 2013, 2014, and 2015. The all-day breakfast initiative in the fourth quarter of 2015 attracted fresh buying interest, triggering a breakout that unfolded through an Elliott five-wave advance into the August 2019 high at $220.22. The stock sold off into November and bounced strongly, stalling once again in February 2020 just two points below the prior high.
The subsequent decline relinquished more than 90 points into March, posting a two-year low in the $120s, ahead of a strong recovery into the second quarter. The stock acted exceptionally well through the summer, completing a round trip into the 2019 high in September. An October breakout posted an all-time high at $231.91 before turning tail in a failure swing that reinforced resistance at $220. Selling pressure settled below $210 in November, but buyers have failed to appear in the past three months, despite strong benchmark price action.
McDonald's stock closed below the 200-day exponential moving average (EMA) on Thursday for the first time since July, highlighting technical damage that favors a decline similar in length to the August into November selloff. That would drop the price into the mid-$180s and toward the 50-month EMA at $178, with that level narrowly aligned at the 50% rally retracement. In turn, that could mark a low-risk buying opportunity, ahead of more vigorous buying power when the world emerges from the pandemic winter.
Elliott Wave Theory was developed by Ralph Nelson Elliott to describe price movements in financial markets, in which he observed and identified recurring, fractal wave patterns. Waves can be identified in stock price movements and in consumer behavior. Investors trying to profit from a market trend could be described as "riding a wave."
The Bottom Line
McDonald's missed fourth quarter top- and bottom-line estimates this week, adding to a bearish tape that could drop shares of the fast food king toward the $180 level.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.