Are McDonald's Shares Still on the Value Menu?

McDonald's MCD reported third quarter earnings this morning, and shares are soaring as a result of the earnings beat. After the run up, are shares still on the value menu? The Oakbrook, Ill.-based company reported third quarter earnings of $1.45 per share on $7.17 billion in revenues. Wall Street had been expecting earnings of $1.43 per share on $7.01 billion in revenues. In addition, it said that U.S. same-store-sales in the third quarter were up 4.4%, with Europe being even higher, up 4.9%. It also guided October same-store-sales to be between 4 and 5 percent, which will be released on November 8. "McDonald's third quarter results reflect the ongoing strength of our customer-focused Plan to Win. We are executing the right strategies to grow the business for the long term while delivering consistently strong quarterly results," said McDonald's Chief Executive Officer Jim Skinner. "The investments we are making to optimize our menu, modernize the restaurant experience and broaden McDonald's accessibility with ongoing convenience and value platforms are driving profitable market share growth – a clear indication that our strategy is working." "McDonald's continued success is driven by the strategic and operational fundamentals that guide our business. Our sustained commitment to and execution of the Plan to Win is creating significant brand differentiation that resonates with customers and generates long-term profitable growth for our System and our shareholders. As we enter the final quarter of 2011, our global comparable sales remain strong with October comparable sales expected to be up 4.0% to 5.0%." Deutsche Bank seems to still think there is some value left in McDonald's shares, as the research firm has a Buy rating and a $100 price target. In a note to clients, Deutsche Bank wrote, "MCD posted 3Q EPS of $1.45 (+12% y/y), which was above our est. of $1.41 and Consensus Metrix of $1.42. Revenue of $7.166bn was ~2% ahead of our forecast and consensus, primarily due to stronger Sept comps (+6.6% globally vs. DBe +5.3% and consensus +4.2%)." McDonald's shares have busted through their 52 week highs with today's gain. If McDonald's is able to continue to take advantage of a weak economy with strong same-store sales, and growing their menu, with offerings like Strawberry Lemonade, oatmeal, and other healthy offerings, then investors will continue to flock to shares. There was some concern during the third quarter that McDonald's growth might be slowing, as it missed same-store-sale estimates twice in three months. Investors will want to pay close attention to the results on November 8 to see if this has become a trend, or if these misses were just a bump in the road. At 16 times 2012 earnings, and sporting a 3.1% dividend yield, shares are getting a little on the expensive side. Jim Skinner and the rest of his management team have continued to beat Street expectations for quite a while, and customers continue to flock to the stores. If my friend wearin' big red shoes continues to beat the Street, then investors will continue lovin' it. Even at these valuations. ACTION ITEMS:

Bullish:
Traders who believe that McDonald's will continue to report strong earnings might want to consider the following trades:

• McDonald's run up past the 52 week highs removes near term technical resistance. Traders could add for a short term pop here.

• Traders may also want to see what Yum! Brands YUM has to say. There is the potential for McDonald's to take away market share in China from Yum, as it continues to grow in the world's most populated country.

Bearish:
Traders who believe that McDonald's will lose steam may consider alternate positions:

• If the economy takes a turn for the worse, perhaps not even McDonald's could be immune from the downturn. It managed the downturn in 2008, so keep that in mind.
  
  

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.