(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
McDonald's Corp. (MCD) continues to struggle, with the stock down by more than 10% from its January highs. Options traders in the stock are betting it gets even worse, falling by roughly another 9% following its second-quarter results on Thursday before the stock market's open.
The fast-food company is forecast to report robust earnings growth of about 11.3%, but revenue is forecast to fall by 12%. The technical chart for McDonald's continues to look weak and also suggests that the stock may be poised to fall further in the coming weeks, in line with the options bets.
The options that expire Sept. 21 imply that the stock may rise or fall by about 6.4% from the $155 strike price. It places the stock in a trading range between roughly $145 and $165. But the number of bets that the shares will fall massively outnumbers the wagers it will rise by a ratio of about 8 to 1, with roughly 4,700 open put contracts.
Some are betting the stock falls by over 9% to $144 from its price of roughly $158.70 on Monday. The $145 put options saw a big jump in open interest on July 24, rising by more than triple to 5,300 open contracts. With the options trading at approximately $1 per contract, a buyer of the puts would need the stock to fall to $144 to break even, if holding the contracts until expiration.
Revenue has been steadily declining for McDonald's since September 2013 when reaching $7.3 billion for that quarter. Based on estimates of $5.32 billion for the upcoming results, revenue would be down by as much as 27% over the past five years. Meanwhile, earnings have climbed, and are seen rising to $1.93 per share for the second quarter. Since the second quarter of 2016, profits have jumped by nearly 33%, with most of that growth coming on the heels of cost reductions.
The technical chart is weak for the stock as well, with shares hovering just above technical support at $155.50. Should the stock fall below that support level, it may fall by as much as 6% to about $148 to its next level of technical support. The relative strength index is trending lower since peaking in November 2016 at overbought levels. It suggests that bullish momentum has steadily exited the stock. Volume has also tapered off, an indication that the number of sellers is waning, or that buyers have little interest in the stock. Given the stocks poor performance and bearish options bets, it may be the case of buyers lacking conviction.
After nearly six months of stagnation, the upcoming McDonald's earnings report will likely be a make-or-break moment for the stock. The market appears to be sending a loud message.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.