Investors Wary of McDonald’s Revamp
New York — McDonald’s Corp.’s turnaround plan is making options traders grimace.
Implied volatility on the company’s stock is at its highest since 2008 versus an exchange-traded fund tracking the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The increase signals rising demand for options used to protect against losses in the shares. Short interest on McDonald’s is the highest since 2013.
When Chief Executive Officer Steve Easterbrook announced a plan on May 4 that would reorganize leadership, cut costs and return cash to shareholders, McDonald’s climbed 4.7 percent in two weeks, only to fall back over the following 10 days. To Ben Hart of Haverford Investments, the new plan failed to address the biggest concern investors have about McDonald’s: its image.
“We question whether the current turnaround plans are really enough and address the core problems,” Hart, senior research analyst at Radnor, Pennsylvania-based Haverford, said by phone. “The appeal of fat, salt and sugar hasn’t gone away. This is a problem with the McDonald’s brand.”
Hart’s colleague Tim Hoyle, director of research at Haverford, said that the firm has sold a “significant amount” of its McDonald’s shares over the last year.
The stock has risen 2.4 percent in 2015.
McDonald’s is struggling to turn around its business after 11 straight months of declining global comparable-store sales. The company said on May 27 that it will stop reporting the measure on a monthly basis.
Becca Hary, a spokeswoman for McDonald’s, didn’t respond to a voicemail message seeking comment on the options.
The Oak Brook, Illinois-based company is trying to stem an exodus of customers. It finds itself sandwiched into a situation where diners are either seeking higher-quality food at growing chains like Chipotle, or cheaper fare at traditional rivals like Burger King and Wendy’s.
“McDonald’s has a whole lot of competition it needs to deal with,” Robert Pavlik, who helps oversee $9 billion as chief market strategist at Boston Private Wealth in Boston, said by phone. “My kids don’t want to go there because it’s just not that appealing and there are so many better options.”
The relationship between McDonald’s and its U.S. franchise owners has also become strained. A survey of restaurant owners conducted by Janney Capital Markets and published on April 15 showed that the six-month outlook for the company was the worst in the study’s history going back to 2003.
They also rated their corporate ties poorly. Ninety percent of the more than 14,000 U.S. McDonald’s restaurants are run by franchisees. Multiple respondents indicated the situation was the worst they’d ever seen, Mark Kalinowski, a Janney analyst in New York, wrote in the report.
Still, McDonald’s remains an enticing stock for value-oriented investors. Even though it’s greatly pared its holdings in the company, Haverford has kept shares in portfolios designed to seek dividend returns, according to Hoyle. McDonald’s stock yields 3.5 percent, almost twice the median cash return for the full S&P 500.
The six-month implied volatility spread between McDonald’s shares and the SPDR S&P 500 ETF Trust rose to 5.78 percent on May 28, the highest since October 2008.
Short interest in the company spiked to 0.51 percent of shares outstanding on June 1, the most since November 2013, according to Markit Ltd.
“It’s a very mature company that’s trying to reinvent itself, and it’ll be very difficult for them to change,” Pavlik of Boston Private Wealth said. “There are going to be a lot of costs associated with trying to turn around their business. They have a long, tough road to go.”