U.S. comps improved 1% for the second quarter. While this is a positive, it’s not terrific. And as far as the Asia Pacific/Middle East/Africa region is concerned, comps dropped 0.3%, mostly due to weakness in China and, to a lesser extent, Japan. Overall, comps increased 1%, but this was weaker than a 3.7% jump in the year-ago quarter.
McDonald’s will continue to innovate its menu, upgrade restaurants, expand internationally, and focus on value, but management expects the challenging economic environment to continue. This will put pressure on comps and negatively impact results for the remainder of the year.
Rising threats or false hopes?
McDonald’s and Burger King Worldwide Inc (NYSE:BKW) are often brought up in conversation together. Burger King’s stock has appreciated 19% year-to-date, which is better than McDonald’s at 10%. Nonetheless, Burger King is facing similar headwinds in its business, as well as re-imaging costs. Burger King re-imaged 600 stores in 2012, which led to an average 10% to 15% sales boost at those locations. Re-imaging, however, is costly, and Burger King plans on renovating 40% of its stores by 2015.
Burger King’s comps improved 0.6% in the second quarter, but just like McDonald’s, comps weren’t as impressive as last year when results increased by a much higher 4.4%. This is a big drop-off, and with Burger Kind trading at 45 times earnings versus McDonald’s at 17 times earnings, Burger King doesn’t look to be a better investment than McDonald’s.
The Wendy’s Co (NASDAQ:WEN) has blown away its peers year-to-date for stock appreciation, as the stock has advanced 66%. Wendy’s has focused on an expansive remodeling, and it looks as though the investment has paid off thus far. Comps improved just 0.4% for the second quarter, but Wendy’s expects the second half of the year to be strong. The company projects comps will improve 2% to 3% by year’s end.
Wendy’s recently reduced its advertising campaign, which lowered costs. If Wendy’s can see continued momentum while keeping costs low, then the stock has the potential to run higher. However, Wendy’s might be a little ahead of itself at this point, as it’s now trading at 209 times earnings. While upside potential for Wendy’s is clearly evident, it would be a much riskier play then McDonald’s at this point in time.
Conclusion
McDonald’s is facing many headwinds. Management is concerned about the macroeconomic environment, competition is consistently increasing, and price increases don’t look to be a potential reality for a considerable amount of time. That said, McDonald’s is still a low-cost operation with one of the strongest brands in the world, and in the long run it should be capable of fighting off competition that’s attempting to steal significant market share.
This doesn’t look to be the ideal time to invest in this quick-service restaurant. But McDonald’s remains a high-quality company that should make for a good long-term investment. Therefore, it’s recommended that you only buy a small amount of shares now and then buy slowly and incrementally if the stock suffers.
The article Weakness at McDonald’s Might Present an Investment Opportunity originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald’s. The Motley Fool owns shares of McDonald’s.
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