Why McDonalds’ Stock May Suffer a Big Pullback

(Note: The author of this fundamental analysis is a financial writer and portfolio manager)

McDonald's Corp. (MCD) bulls may be too optimistic with lofty expectations that may only lead to disappointment. The average analyst price target is looking for the stock to climb by over 16% to $186.30, from its current price around $160, according to data from YCharts. The stock has underperformed the S&P 500 over the past year, with the stock rising by 2.6%, versus the S&P 500 rise of almost 15%. Even worse, McDonald's stock is down over 10% from its highs in early January. (For more, see also: Why McDonald's Oversold Stock Still Looks Expensive.)

Shares of the fast-food hamburger company are already expensive, trading at over 19 times 2019 earnings estimates. Analysts have also started changing course and have been trimming their revenue and earnings estimates in recent weeks for their 2019 outlook. Meanwhile, the technical charts show that the stock can't gain any positive momentum and may fall by 8%. That would mean the stock would be down nearly 17% from its high. 

Shares Are Not Cheap

McDonald's stock isn't cheap at its current earnings multiple given that earnings growth is expected to decelerate in 2019, falling to 7.8% from 15% in 2018. It leaves the stock trading with a PEG ratio of 2.5. It means that the PE ratio is trading at more than double the earnings growth rate, making shares expensive. 

Trimming Estimates

Another bearish sign, analysts have started to trim earnings and revenue estimates for 2019, a shift from the previous trend which had seen those forecasts steadily rising. It may be the start of something more meaningful or just an adjustment. However, McDonald's did get an added benefit when it reported first-quarter results due to a weak U.S. Dollar. The dollar has strengthened since that time, and that may end up hurting results. 

MCD Revenue Estimates for Next Fiscal Year Chart

MCD Revenue Estimates for Next Fiscal Year data by YCharts

Bearish Technical 

The chart shows the stock has had a great deal of technical support at $155. However, the stock has recently seen increasing levels of volume on days the stock was falling, and weak levels of volume on the days the stock has risen, a bearish indication. Another bearish indicator is the relative strength index which has been trending lower since peaking at an overbought level above 70 in early November; a sign the bullish momentum is coming out of the stock. Should shares fall below support at $155, they could fall to about $148, a drop of nearly 8%.

McDonald's will post its quarterly results in a matter of weeks, and perhaps those results will be good enough to lift the stock sending it back to its all-time highs. But if the results fall short or even come in-line, it might prove to be the turning point sending the stock lower. 

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.

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