McDonald’s Corporation (MCD): Why This Fast Food Play Is Facing a Tough Year

But this isn’t just about the US. The optics in China are becoming cloudy thanks to a combination of the chicken supply problem at Yum! Brands, Inc. (NYSE:YUM)’s subsidiary, KFC, and a later outbreak of Avian flu. All of which has caused issues for the rest of the fast food outlets in China. While this is causing some to believe that there is an inbuilt opportunity to bounce back in the second half of 2013, I’m not so sure. If you look at the chart above, McDonald’s Corporation (NYSE:MCD) APMEA growth was slowing well before these issues kicked in. Indeed, it was a similar story with Yum, so this isn’t just a story of some temporary weakness.

So even while China’s performance is uncertain, there is no let up in investment with McDonald’s planning to open hundreds of restaurants in China in 2013. Similarly Burger King Holdings, Inc. (NYSE:BKW) wants to open 1,000 stores in China within the next seven years, and the country is the focal point of Yum! Brands, Inc. (NYSE:YUM)’s growth plans. Obviously these companies wont adjust their long term strategic plans based on some temporary weakness, but might it prove a longer term issue?

As for Europe, despite previous efforts to take action in France and Germany conditions remain weak in Europe, and macro challenges in Southern Europe mean that growth will be hard to come by. Only the UK and Russia are performing in a manner that McDonald’s can be happy with.

Where Next for McDonald’s?

I think this is going to be a tough year for the company. Commodity costs are only forecast to go up 1.5-2.5%, but the real driver of earnings growth will be sales growth. Given that the stated strategy is to preserve or gain market share, it is hard to see any significant margin expansion this year. There is a lot of uncertainty with China, Europe remains in difficulty, and the US is becoming increasingly competitive. In conclusion it is hard to make the case that McDonald’s is the kind of defensive play that investors should be chasing, and if the market loses its fixation with yield then it might not be so well supported.

The article Why This Fast Food Play Is Facing a Tough Year originally appeared on Fool.com and is written by Lee Samaha.

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