McDonalds Myth: Defensive stock?
earnings. Sales in the USA were flat and as s result, the street
punished the stock. Many view McDonalds as a defensive stock even in
tough times. Why? I believe the rationale goes like this. People
have to eat (even in tough times nonetheless). But here are two main
reasons why I don't believe McDonalds is a truly defensive stock.
1. Few people purchase the higher margin healthy items.
I haven't been to a McDonalds in ages, but last time I checked their
healthy choice menus are considerably more expensive than their
sandwich of the day or value menus. In tough times, people are less
likely to be eating the higher priced healthy items? Why? It's a
simple issue of cost. $5-6 for a salad? You thow in a drink and that
'value' meal at McDonalds is almost a $10 meal once you factor in
taxes. People prefer the normal fries, pop and burger combination.
They are cheaper and arguably taste better even though it will likely
give you a heart attack.
2. McDonalds isn't that cheap to eat at
Let's face it. When I was a kid, McDonalds was cheap. I realize
that inflation has kicked in over time and things aren't as cheap as
they once were, but their combos are far from economical. I don't
know about you, but if I were in a pinch, I wouldn't eat at McDonalds.
I'd simply just eat at home more often. While I realize that many
Americans eat out at fast food about 3-4 times a week, there are other
lower cost options. The fast food space is very crowded with many
options to choose from. With competitors like Wendy's attempting to
undercut them in prices (see their value menus), it's hard to
consistently hit a home run out of the park. McDonalds is definitely
feeling the pain.
Comments
Just because a stock is able to fall from a high perch doesn't mean that it is not defensive. McDonalds stock has gotten ahead of itself valuation wise, as has some othr defensive stocks like PG. That does not take away from the fact that these companies are not as economically sensitive as non-defesive stocks...
Unless you're buying the the value items, the average combo is hardly $6. After tax some of them come close to $8 a combo.
I just think that in tough economic times, people will generally eat in at home more and as a result, these fast food chains like McDonalds will be hit.
It is a convenience thing, not a money thing for most people. It also tastes good...but it'll kill ya...