McDonald’s Could Have Tough Time Rebuilding Lost Revenue

McDonald’s Corp. (MCD) got battered and bruised in the first quarter, with operations all over the world shutting down due to the coronavirus pandemic. The fast food king recovered part of the slack with pick-up and delivery services but franchise operators suffered badly because the company also acts as the landlord in most cases, collecting lease payments. Given the massive headwinds, Q1 2020 revenue contraction of 6.2% year-over-year made perfect sense.

Slow Progress On Business Resumption

Franchisees are now reopening in accordance with local jurisdictions, with most locations requiring social distancing and other safety measures. Results have been encouraging but mixed so far, with May U.S. comparative sales dropping 5.1% year-over-year compared to 19.2% in April. Worldwide sales have underperformed those mixed metrics, dropping 20.9% in May and a whopping 39.0% in April. Even so, Mickey D just announced it will hire about 260,000 employees this summer to fulfil growing demand.

SunTrust analyst Jake Bartlett just raised McDonald’s price target to $208, advising that comparative sales were better than expected, noting “excluding the impact of temporary store closures, we estimate that international sales per store are ‘flat’ to down slightly, demonstrating strong demand as markets re-open. We expect MCD’s $200 million supplemental ad fund contribution to help drive positive global same store sales by Q4 2020 (Q3 2020 for the U.S.)”

Wall Street And Technical Outlook

The rest of Wall Street is generally bullish on the stock as well, with 22 ‘Buy’ and 7 ‘Hold’ recommendations. No analyst is recommending that investors sell shares at this time. Price targets currently range from $170 to a street high $245 while McDonald’s is now trading just 13 points above the low target. This placement is a two-edged sword because, while it offers plenty of room for growth, the sub-par performance could be hiding undisclosed headwinds.

The stock has been an outstanding performer since 2015 when it broke out above 4-year resistance near 100. It more than doubled into August 2019’s all-time high at 222 and turned lower in a persistent downtrend that accelerated in the first quarter of 2020. The second quarter bounce has recovered about two-thirds of the downside but the recovery wave has now reached tough resistance in the 190s. This is a natural location for short sellers to reload positions.