Can McDonald’s Turn it Around Again? (MCD)

Post author:Marubozu
Post published:November 13, 2012

By Shauna O’Brien
November 12th, 2012

After several years of outperformance, McDonald’s shares hit a big snag recently. Has the company turned back the clock in a bad way?

MacDonald’s Chart (MCD): Break Support!

The Skinner Era: A Comeback Story

In 2004, following the unexpected passing on CEO Jim Cantalupo, McDonald’s appointed Jim Skinner as its new CEO. Skinner had been with the company for over 40 years, starting off flipping burgers. He climbed his way up the ladder in the next few decades, no one could have anticipated the turnaround Skinner orchestrated once he took over as chief executive.

You see, back in 2004, McDonald’s stock was in the pits. The company traded at roughly $25 per share with annual revenue of around $17 billion. Skinner knew that the company needed a change, and he knew that MCD needed to be better positioned in the market. By studying competitor’s strategies and marketing tactics, he decided that improving customer service, updating restaurants, and changing the menu — adding new and healthier choices for customers — was essential to McDonald’s success. This strategy was designed to catapult the company ahead of its fast food competition, and that it did.

Eight years later, Skinner retired from the company and was replaced by Donald Thompson. By the time Skinner had retired, MCD stock hit over $100 before pulling back to around $90 per share, a 377% increase from the price prior to Skinner talking the helm. At the time of his retirement, the menu offered over 100 options, the customer service made significant improvement, and customers were able to eat in cleaner, more up to date restaurants. McDonald’s yearly revenue also climbed to $27 billion by 2011, up 59% since Skinner became CEO.

Additionally, during the Skinner years, McDonald’s dividend payouts increased drastically. McDonald’s paid an annual dividend of only 40 cents in 2003. The dividend increased every year thereafter, and the company now pays $3.08 annually.

The Post-Skinner Era: Not a Good Start

In July 2012, Donald Thompson took over as McDonald’s CEO. Thompson had worked for the company for 12 years, and became the company’s first African American CEO. Since the management change was announced, the company’s stock has declined 10 points. But the change in management is far from the only reason for MCD’s pullback.

Why McDonald’s Keeps Falling

The company can point to several reasons for its recent underperformance. Let’s take a look at a few of those factors below.

Weak monthly same-store sales
In October 2012, MCD saw its first decline in same-store sales since 2003. Its sales fell 1.8% in the period, including a 2.2% decline in its U.S. restaurants. Sales dropped globally as well, decreasing by 2.2% in Europe, and 2.4% in the Asia Pacific, Middle East, and Africa region.

The company intimated that competition was getting fierce with lead competitors Burger King and Wendy’s. Although both were hit hard by the recession, the companies were being proactive about it, adding new choices to their menus including more breakfast and salad options.

Third quarter miss on earnings
McDonald’s third quarter profit was reported at $1.46 billion, or $1.43 per share, a 3% decline from 2011′s third quarter results. That total missed Wall Street’s expectation of $1.47 per share.

Revenue also declined to $7.15 billion, narrowly beating analysts’ view of $7.14 billion.

Analysts are becoming less bullish on the stock
With the decline of MCD’s stock, and more importantly its same-store sales, many analysts have become cautious with their estimates. Analysts at UBS cut their 2013 estimates for the company, resulting from declined sales and weak currency. Additionally, analysts at Oppenheimer issued cautious commentary regarding the company. Oppenheimer rated the company a “Perform,” but noted that they were expecting the company’s next few quarters to be weak.

Lower restaurant traffic
McDonald’s has been seeing decreased traffic in many of their restaurants. The company has been facing problems with competitors, which has decreased the total amount of monthly customers for the company. In response, McDonalds has increased advertising on their dollar menu and their value meals, which have brought down sales.

Are Consumers Getting Weary of McDonald’s?

The king of fast food is slipping. Analysts now expect a 1.05% fall in McDonald’s U.S. fast food market share, as the company battles for customer dollars with restaurants like Burger King, Wendys, and YUM! Brands (YUM) restaurants including Taco Bell, Pizza Hut, and KFC. The recent global economic recession has only made the fight for market share fiercer.

Many customers are simply looking for healthier dining options. Many fast food giants have been offering healthier choices to keep up with competition. Wendy’s has Garden Sensations salads, McDonald’s has a Fruit ‘n Yogurt Parfait, Burger King has a Veggie Burger, and Arby’s has a Light Menu. These restaurants have been offering health foods since the 90’s, but it was not until recent times that offering these healthier choices was essential.

It is clear that if McDonald’s wants to remain on top, they must continue with innovations and improving the quality of their company’s operations. Lack of innovation just may continue to eat into its massive 49.6% fast food market share.

What McDonald’s Can Do to Stop the Bleeding

McDonald’s will have to do something in order to turn around its recent decline. Formerly, the company was aggressive with investments and acquisitions. Between the years of 1998 and 2000, MCD acquired Donato’s Pizza, Chipotle Mexican Grill, and Boston Market (it later divested its interests in these entities to focus on its core business). Possible future acquisitions may help the company become more diverse and hold onto market share.

McDonald’s restaurants are 80% franchisee-owned. As such, the company takes on a certain amount of risk allowing so many outside companies run the vast majority of its locations. corporation. Although there are benefits to franchising restaurants, including lower costs, allowing a separate company to run a part of a corporation can result in operational issues and lack of control. It is possible that McDonald’s may do better if they obtained more control over their company by owning a larger portion of their restaurants.

Over the last few years, McDonalds has made several major innovations which had given the company great success. The first innovation the company made was outsourcing their drive thru window order taking. In order to make the ordering process as quick and accurate as possible, the company created an outsourcing system which allowed on site employees to work on customers orders, while another person not actually in the building was taking the order. Secondly, the company expanded their dollar menu to breakfast items, allowing daily commuters to order money saving breakfast items. Additionally, the company expanded their menu, and started offering specialty coffees at a competitive price. The company can’t just rest on its laurels, however. It’ll need continued innovation in the fast food space to turn its fortunes back around.

The Bottom Line

It’s up to McDonald’s to prove to the world that it can stay on top of the fast food industry. Its store traffic and sales have begun to slip. The company’s stock price is right at 52-week lows. Can a new CEO stem the tide and deliver the same sort of results that the legendary Jim Skinner did? Only time will tell.

McDonald’s(MCD)is not recommended at this time, holding a Dividend.com DARS™ Rating of 3.4 out of 5 stars.

Be sure to visit our complete recommended list of the Best Dividend Stocks, as well as a detailed explanation of our ratings system here.

Diversified Returns of the 12 Sector Indices

Post author:Marubozu
Post published:November 12, 2012

In the year-to-date, the 12 FTSE ST Sector Indices that cover the 161 stocks of the FTSE ST All Share Index have generated returns that ranged from 44.8% for Real Estate Holding & Development to -19.6% for Consumer Goods Index. The FTSE All Share Index has gained 15.9% over the period. Sorted by best performing FTSE ST Sector index, the largest stocks of each sector index are currently as follows:

The Real Estate Holding & Development Index has gained +44.8% in the year-to-date. The biggest three stocks of the Index are Hongkong Land Holdings (H78), CapitaLand (C31) and Global Logistic Properties (MC0) which are all categorised to the Real Estate Investment & Services Sector by the Industry Classification Benchmark (ICB). In the year-to-date the three stocks have gained +47.4%, +54.8% and +52.1% respectively.
The Real Estate Investment Trust (REIT) Index has gained +31.1% in the year-to-date. The biggest three REITs of the Index are CapitaMall Trust (C38U), Ascendas REIT (A17U) and CapitaCommercial Trust (C61U). In the year-to-date the three trusts have gained +21.2%, +25.7% and +46.0% respectively. This does not take into account dividend distributions.
The Financials Index has gained +28.6% in the year-to-date. The biggest three stocks of the Index are DBS Group Holdings (D05),Oversea-Chinese Banking Corp (O39), United Overseas Bank Ltd (U11) which are all categorised as Banks by the ICB. In the year-to-date, the three locally incorporated banks have gained +22.2%, +16.2% and +19.8% respectively. The FTSE ST Financial Index also includes the stocks of the Real Estate Holding & Development Index and the REIT Index.
The Industrials Index has gained +22.5% in the year-to-date. The biggest three stocks of the Index are Jardine Matheson Holdings (J36), Jardine Strategic Holdings (J37), and Fraser & Neave (F99) which are all categorised as General Industrials by the ICB. In the year-to-date, the three stocks have gained +26.7%, +27.6% and +48.2% respectively.
The Oil & Gas Index has gained +16.1% in the year-to-date. The biggest three stocks of the Index are Keppel Corp (BN4), SembCorp Marine (S51) and SembCorp Industries (U96) which are all categorised as Oil Equipment, Services & Distribution by the ICB. In the year-to-date, the three stocks have gained +9.1%, +14.1% and +23.2% respectively.
The Utilities Index has gained +8.5% in the year-to-date. The biggest three stocks of the Index are Hyflux (600), Gallant Venture (5IG) and United Envirotech (U19) which are all categorised as Gas, Water & Multiutilities by the ICB. In the year-to-date, the three stocks gained +9.1%, +12.5% and +15.4% respectively.
The Telecommunications Index has gained +4.3% in the year-to-date. The three stocks of the Index are Singapore Telecommunications (Z74), StarHub (CC3), M1 (B2F) which are all categorised as Mobile Telecommunications by the ICB. In the year-to-date, the three stocks have gained +2.6%, +24.7% and +4.8% respectively.
The Technology Index has gained +1.7% in the year-to-date. The biggest three stocks of the Index are LionGold Corp (A78), CSE Global (544) and DMX Technologies Group (5CH). In the year-to-date, the three stocks generated mixed performances of +19.5%, +13.3% and -10.6% respectively. Liongold is categorised as Technology Hardware & Equipment by the ICB while CSE Global and DMX Technologies Group are categorically sectored to Software & Computer Services.
The Consumer Services Index has marginally declined -0.8% in the year-to-date. The biggest three stocks of the Index are Jardine Cycle & Carriage (C07), Genting Singapore PLC (G13) and Singapore Airlines (C6L). In the year-to-date, the three stocks generated mixed performances of -2.0%, -18.2% and +3.2% respectively. Jardine Cycle & Carriage is categorised as a General Retailer by the ICB while Genting Singapore PLC and Singapore Airlines Ltd are categorised to the Travel & Leisure sector.
The Basic Materials Index has declined -4.6% in the year-to-date. The biggest three stocks of the Index are Midas Holdings (5EN), XinRen Aluminum Holdings (MN5), Li Heng Chemical Fibre Technology (E9A). In the year-to-date, the three stocks have gained +13.6%, +12.5% and +14.6% respectively. Midas Holdings and XinRen Aluminum Holdings are categorised as Industrial Metals & Mining by the ICB while Li Heng Chemical Fibre Technology is categorically sectored to Chemicals.
The Health Care Index has declined -10.1% in the year-to-date. The biggest three stocks of the Index are IHH Healthcare Bhd (Q0F), Biosensors International Group (B20) and Raffles Medical Group (R01) which are all categorised as Health Care Equipment & Services by the ICB. In the year-to-date, the three stocks generated mixed performances of +15.0%, -23.1% and +14.6% respectively.
The Consumer Goods Index has declined -19.6% in the year-to-date. The biggest three stocks of the Index Wilmar International (F34), Golden Agri-Resources (E5H) and Olam International Ltd (O32) which are all categorised as Food Producers by the ICB. In the year-to-date, the three stocks have declined -36.6%, -14.0% and -12.0% respectively.

Grouping stocks by sectors is a practice that may assist investors spread portfolio risk and potential return across different industries. For up-to-date information on the width and depth of the sectors that are represented by stocks listed on Singapore Exchange, investors can visit the Markets Tab at My Gateway here.

Source: SGX My Gateway

What is the Fiscal Cliff?

Post author:Marubozu
Post published:November 11, 2012

By Thomas Kenny, About.com Guide

“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:

They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.
They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

Can a Compromise be Reached?

The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had three years to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. The most likely result, in any event, is that the problem will linger at least until after the election, and there’s a strong possibility that Congress won’t act until the eleventh hour. Another potential obstacle is that the next Congress won’t be sworn in until January 3.

The most likely result is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. The election will almost certainly have an impact on the direction of future policy, particularly if one party earns a decisive victory. Nevertheless, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.

Possible Effects of the Fiscal Cliff

If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs. A Wall St. Journal article from May 16, 2012 estimates the following impact in dollar terms: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 million from the expiration of the Obama payroll-tax holiday; $40 million from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to the J.P. Morgan report.” Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.

The cost of indecision is likely to have an effect on the economy before 2013 even begins. The CBO anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes, possible reducing GDP by a full half-percent in the second half of 2012.

Having said this, it’s important to keep in mind that while the term “cliff” indicates an immediate disaster at the beginning of 2013, the impact of the changes – while destructive over a full year – will be gradual at first. What’s more, Congress can act to change laws retroactively after the deadline. As a result, the fiscal cliff won’t necessarily be an impediment to growth even if Congress doesn’t address the issue until after 2013 has already begun.

From Investopedia

Investopedia Says

Definition of ‘Fiscal Cliff’

A combination of expiring tax cuts and across-the-board government spending cuts scheduled to become effective Dec. 31, 2012. The idea behind the fiscal cliff was that if the federal government allowed these two events to proceed as planned, they would have a detrimental effect on an already shaky economy, perhaps sending it back into an official recession as it cut household incomes, increased unemployment rates and undermined consumer and investor confidence. At the same time, it was predicted that going over the fiscal cliff would significantly reduce the federal budget deficit.

Investopedia explains ‘Fiscal Cliff’

Because 2012 was a presidential election year, Congress delayed dealing with the fiscal cliff issue, leading to much speculation about how the scheduled tax and spending changes would play out and the potentially negative consequences of letting both occur without modifications. While the term “cliff” implied that the changes would have immediate, destructive and final consequences, some policy and economic analysts said that the consequences would be gradual and that negative outcomes like tax increases could be undone.