Special Sauce Missing In McDonald?s Revamp As Volatility Climbs
By Joseph Ciolli
(Bloomberg) — McDonald 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 stock over the last year.
Comparable Sales
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.?
Franchise Relationship
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.?