MCD: Juicing Gains with Options
October 25, 2007 2:25 pm SmartGuyDH Picks- Buy MCD March ‘08 45 Calls around 13
McDonald’s Corp (NYSE: MCD) is continuing its bullish turnaround. Following last week’s earnings, I believe the company has at least an additional 12-24 months of superior returns ahead. The new coffee offerings will surely keep the positive PR coming as McDonald’s starts throwing that hefty marketing budget behind their java. Moreover, international expansion and sales are benefiting nicely from increasing demand and a weaker dollar. Lastly, as the US consumer looks for ways to prune spending, say goodbye to Applebee’s (Nasdaq: APPB) and hello to McDonald’s dollar menu (you don’t think people will actually cook, do you?).
However, the easy money has been made. Thus, to juice returns I recommend snapping up deep in-the-money calls. Options are a risky way to bet on equities, but I believe a fairly conservative strategy is purchasing deep in the money calls for blue chip stocks that are doing well. For example, you can purchase the March 08 45 MCD calls for a 20-30 cent premium. So long as MCD can get to 60 by the strike date, you will have a 15+% return versus a 3.5% return. Not a bad way to beat the market over the next 5 months.
Disclosure: SmartGuyDH owns MCD call options
October 29th, 2007 at 2:15 pm
Coincidentally, a couple days after posting this recommendation, Forbes is recommending MCD calls:
http://www.forbes.com/2007/10/27/coke-altria-mcdonalds-pf-ii-in_bgm_1027options_inl.html?partner=yahootix
November 9th, 2007 at 12:00 pm
S&P REITERATES STRONG BUY RECOMMENDATION ON MCDONALD’S CORP.
MCD; $59.32
October comparable sales rose 6.9%, above our expectations, on surprising strength in the U.S., where comparable sales rose 5.4% vs. a 5.6% gain in October a year ago. Systemwide sales growth of 14.2% suggests strong start to the fourth quarter, for which we project a 10.9% rise. In constant currency, systemwide sales rose 7.8% in Europe and 12.9% in Asia Pacific/Middle East/Africa, we believe a reflection of new menu item rollouts and international expansion. We think results support our above-Street fourth quarter EPS estimate 78 cents, exclusive of 35 cents non-recurring tax benefits. Our target price remains $68. /M. Basham
November 11th, 2007 at 5:53 pm
Two weeks following my MCD recommendation, Jim Cramer calls the stock “bullet-proof”:
In an environment of weakness, Cramer urged viewers to seize on “opportunities to buy the stocks that could make your portfolio into a bulletproof vest.”
McDonald’s (MCD - Cramer’s Take - Stockpickr), which Cramer has applauded for its consistent performance, is “loaded with American growth and European growth,” important qualities for a stock that is expected to weather a market storm.
Additionally, there’s a catalyst to buy McDonald’s, Cramer said: “There’s an analysts’ meeting next Tuesday, and if I were you, I’d get in ahead of this meeting.” With McDonald’s down a dollar ahead of the meeting, investors should find a good entry point, Cramer said.
“Yesterday, McDonald’s was one of the only stocks that actually went up,” Cramer said, thanks to positive same-store sales.
“The McDonald’s I know is an international story,” Cramer said. Viewers can expect the company to showcase new products, new initiatives and European growth at the analysts’ meeting.
“There aren’t that many stocks that can deliver consistently on international growth,” Cramer said, but McDonald’s is one of them. Furthermore, the economy is likely to make times tougher for people. When things are bad, people start to eat at McDonald’s more often.
“I would buy this on Monday,” Cramer said.
November 12th, 2007 at 3:35 pm
Nothing to Grimace About at McDonald’s
McDonald’s (MCD: NYSE)
By UBS ($59.37 Nov. 9, 2007)
WE ARE REITERATING our Buy rating on McDonald’s and raising our
estimates. We are also raising our target price $2 to $66, which is
18.5 times our 2009 earnings-per-share estimate of $3.53 (up 10%
year-over-year).
Sales momentum is continuing around the world. McDonald’s reported yet
another month of strong same-store sales (SSS) growth in all of its
key markets in October. Global SSS growth was 7% (UBS estimate: 4%),
driven by US: 5.5% (versus 4%); Europe: 6.5% (3%); and Asia
Pacific/Middle East/Africa: 9.5% (7%).
The dollar has weakened by 3% versus both the euro and the pound since
Oct. 1. We are raising our fourth-quarter 2007 EPS estimate by 1 cent
to 70 cents (Street: 68 cents) and our 2008 estimate to $3.21 (up 12%
year-over-year, Street: $3.13) based on today’s sales and our updated
currency model.
In Europe, the U.K. continues to be a key turnaround market as it
benefits from new premium and value-oriented chicken offerings. We
believe chicken innovation and new kitchen systems should benefit
mainland Europe sales/profit in 2008/2009. Russia trends and currency
are also helping growth.
McDonald’s U.S. continues to benefit from strong family business,
breakfast and late night trends. In addition, its dollar menu and
SnackWrap have been an oasis of non-inflation for consumers. The
innovation pipeline, day-part mix, and value perceptions provide solid
sales visibility into 2009 in spite of uncertain economic conditions.
Relative earnings for fast-food stocks are primarily driven by SSS,
unit growth (or lack thereof), and currency. Other factors that can
impact same-store sales and relative earnings growth include: U.S.
restaurant industry demand; menu innovation; food-commodity-cost
inflation; wage inflation; weather; competitor menu and marketing
moves; and difficult comparisons.
Other longer-term risks include obesity regulation risk and food
contamination risk. A decline in large-capitalization stocks or a
strengthening in the U.S. dollar (particularly versus the euro) could
have an adverse effect on McDonald’s stock. Of our restaurant stocks,
McDonalds is the most sensitive to general stock movement, with a beta
of 0.90. And with roughly half of its profit derived from
international sources, McDonald’s stock is the most impacted by
currency.
McDonald’s and its franchisees and affiliates operate more than 31,000
quick-service restaurants that generated over $58.1 billion in 2006
system-wide sales. Roughly 52% of profit is generated from
international markets, with most of that coming from European
operations. The McDonald’s brand represents 96% of the company’s
world-wide units. About two-thirds of company profit is generated by
payments from franchisees.
– David Palmer
– Michael Binetti
– Samantha Hoh