Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Are Reports of McDonald’s Turnaround Exaggerated?

McDonald’s (NYSE: MCD) is showing us why it is always a good idea for investors to pay more attention to financial numbers than the news media. The earnings the fast-food icon reported on Dec. 31, 2015 indicate that reports of a McDonald’s turnaround are greatly exaggerated.

Despite all the hype about all-day breakfast, McDonald’s revenues are still falling and went down for every quarter in 2015. The burger chain started 2015 with a TTM revenue of $27.44 billion, which fell to $26.7 billion in March, $26.02 billion in June, $25.64 billion in September, and $25.41 billion in December.

Get the picture, folks? McDonald’s lost revenue for every quarter in 2015, including the fourth, in which it started offering the all-day breakfast. Even if selling Egg McMuffins after 11 a.m. is increasing sales, those sales are not generating any additional revenue.

By my calculations, McDonald’s lost $2.03 billion in revenue in 2015. That does not look like a company in a turnaround to me; instead, it looks as if losses at the chain are accelerating.

A Little Good News at McDonald’s

There is a little good news in McDonald’s earnings numbers. Its cash from operations did increase in 2015. The company started the year with a cash from operations number of $6.730 billion, which fell to $6.522 billion in March, rose slightly to $6.54 billion in June, and hit $6.664 billion in September. Unfortunately, cash from operations numbers for December was not available.


This does indicate some increased sales and cash flow, but that is not translating into revenue yet. McDonald’s might be starting to turn around, but the change is not showing up on the balance sheet yet.

Interestingly enough, the cash from operations increases preceded the launch of the all-day breakfast menu in October. That indicates such a move might not have been needed. It’ll be interesting to see if it will actually increase the cash flow.

Although the income numbers indicate that might already be happening, the income collapse at McDonald’s appears to have been reversed. In December 2014, McDonald’s reported $4.758 billion in revenue, which fell to $4.36 billion in March and $4.180 billion in June. That then reversed and rose to $4.421 billion in September and $4.529 billion in December.

As with the cash from operations growth, the income growth preceded breakfast all day. This once again raises serious questions about that gimmick. It looks like cash flow is increasing, but sales may not be.

McDonald’s is not a Good Investment

This shows us that McDonald’s has some of the characteristics of a value investment, but it is not a good buy. The problem is that this company’s shares seem overpriced for the numbers posted.

The $114.36 share price McDonald’s posted on Feb. 8, 2016 seems excessive for a company with $4.529 billion in income. It looks as if investors are paying for the brand name and not the company.

McDonald’s is a very strong brand, but it’s also a very weak company. The management is disorganized and prone to desperate gambles. For example, instead of experimenting with things like all-day breakfast and higher quality burgers, it’s rolling them out companywide before seeing if they pay off. This indicates there’s unwarranted paranoia in the McDonald’s headquarters that is causing the company to take unnecessary risks.


To make matters worse, some other problems at the company, such as over expansion in the U.S. market, are being ignored. McDonald’s is one company that could benefit from a pruning of its store footprint. In particular, it should consider getting rid of some of the questionable outlets, such as those in the Walmart stores, and abandoning some of the small-town markets.

Plans to expand and increase the number of franchises also seem risky. McDonald’s needs to concentrate on its core operations and get them right, particularly with the massive expansion of chains like Shake Shack that is underway in the U.S.

It is simply too early to tell if the turnaround has begun at McDonald’s. Some of the numbers have improved, but the company has not shown if it is actually fixing its problems or not. Nor is there any indication that sales and revenue are actually improving.