Last night McDonald's announced a change at the top replacing CEO Don Thompson with Steve Easterbrook. This move while not unexpected was surprising in the timing, a mere three days after their earnings announcement.
The company had talked of change but the swiftness of the change was welcomed. Clearly some would argue the change was overdue and should have been implemented in mid-2013 when market share erosion picked up.
We consider McDonald's (MCD, quote) to be one of the great multinational plays in our global EM portfolio. We are long the stock after buying in the mid-4th quarter'14 as guidance disappointment and provided what we thought was an attractive entry point around $92.50. The rationale was that McDonalds' stock had priced in the challenges facing the company and the as a result, MCD was (and is) trading at a major discount to its sector peers, and to some of the global consumer names who have strong EM exposure. Remember, getting exposure to the EM consumer usually comes at a price and a premium over traditional retail multiples because of the growth.
A breakdown of their segment revenue shows that McDonald's is one third US another third Europe and the rest is emerging. From a demographic perspective McDonald's has more to gain in the emerging world then they do from the developed world. The good and the bad news for McDonald's is that some of their target countries are places with significant upside but significant volatility. Russia which is 7 to 8% of sales is a major market yet going through major volatility. McDonald's like all US based multinationals will face significant currency headwinds into thousand and 15. Recent earnings announcement showed that McDonald's could see up to 8% impact on EPS from a stronger dollar.
But focusing on change is why we are excited about the stock and see significant option Aldie to the shares on the upside. Don Thompson had not delivered and needed to go. Steve Easterbrook is seen as a company man who knows the institution thoroughly but has outside experience that gives proper perspective on the change needed.
At a time when expense of valuations are leading to stock underperformance McDonald's has the safety net of a 16 times multiple and a 3.8% given and yelled. These are key to the investment rationale for a company that despite it's in measurable brand influence has underperformed for a long time. The chart below gives a perspective on not only the laggard share price but sentiment (9D RSI) which is near cycle lows.
Here's to change!