McDonald’s Corp. MCD has reported disappointing sales for five straight quarters, despite the fact that the company has introduced new, premium items to its menu and announced plans to expand its McCafé brand with Kraft Foods.
The world’s largest fast food company is also testing a new “build-your-own” burger concept at a Calif.-based location to allow customers to hand pick their toppings.
“They’ve tried to promote items that are too expensive than what their customer wants,” said Will Slabaugh, research analyst at Stephens Inc. “What’s meaningful to the customer is going to revive the company. It’s not going to be ‘I want a no.4 with fries.’”
Company officials acknowledged that the new promotional items did not have the impact the company hoped for.
“We stumped a little bit last year with too many new products, too fast and created lot of complexity,” Tim Fenton, McDonald’s chief operating office, said in the company’s earnings conference call.
Fourth quarter results were flat compared with the year-ago period and profit margins declined at company-operated and franchise restaurants.
Rating the shares “overweight,” Slabaugh said he expects the company to rebound and McDonald’s at its current price could be a good deal for investors.
“It’s an undervalued company,” Slabaugh said. “Right now a lot of people are focusing on promotional hiccups they’ve had in the U.S., not taking into account the strong brand name these guys have.”
At a price-to-earnings ratio of 16.8, McDonald’s is below the industry average of 27.2 and the S&P 500 average of 17.9.
Even so, some analysts say McDonald’s is no bargain.
“We believe McDonald’s pricing power remains constrained by competitive pressures and a disinflationary environment,” said Sara Senatore, senior research analyst at Sanford C. Bernstein & Co.
Since setting a record high of $103.59 last April, McDonald’s stock price has slid 10.4 percent.
“Relative valuation is at its cheapest level since early 2010, reflecting investors doubts about McDonald’s ability to reaccelerate comp growth in a challenging global IEO market, but we do not yet see a catalyst to support positive earnings revisions,” Senatore said.