Please, No Table Service McDonald's Corporation (NYSE:MCD)
Let me cut to the chase. Shares of McDonald's Corporation (NYSE:MCD) have no immediate value and I do not expect them to have value for more than a year, but things could get worse, much worse, before they get better too.
There are two rumors floating around and if they turn out to be true they will have a material impact on EPS growth at McDonald's. These rumors are reasonable in nature, but arguably a companywide change is rare without testing the campaigns at single or regional locations first to gauge their effectiveness, and the rumors are not confirmed officially either, so this discussion is in every way looking ahead at the 'what-ifs.'
First, it is important to note that we have already publicly disclosed our analysis of Fair Value for MCD. This analysis was published in February, and although there have been some slight negative valuation pressures given changes to estimates and price since we published that report, it is still largely applicable today, with the following addition. (Read the fair value analysis).
EPS growth projections for 2016 have come down and the price has gone up since our February report. As Arseno Hall used to say, "Things that make you go hmmm."
In any case, the rumors are our focus here, and the rumors are that MCD may start to serve breakfast all day, and the company may begin to offer table service. I will address each one of these.
First, breakfast is largely the most profitable meal served at restaurants, and even I have flirted with the idea of opening an all day breakfast establishment given the profit margins associated with the likes of eggs, muffins, and pancakes, and although a decision to serve breakfast all day would take up valuable real estate in the kitchen I believe that a decision to serve breakfast all day coupled with intelligent management decisions as those relate to the productivity lines would ultimately add value to customers who are looking for a healthier quick protein-filled snack (breakfast burritos for example) and add to EPS growth and slight margin improvement.
However, the second rumor would be a disaster. If MCD begins to offer table service on a broad scale it will be the downfall of the stock and cause significant EPS deterioration. The company was found on the heels of quality products at an affordable price served in a timely manner. Table service would add to the costs associated with each meal, it would reduce the efficiency experience of the customers, and it would eat into margins and reduce EPS growth even further than growth rates have been reduced already.
In conclusion, if MCD serves breakfast all day it should be ok, an interesting venture, and could have positive benefits although they will not be material, but if MCD decides to offer table service the already rich valuations will get even richer.
I have already advised value investors to avoid MCD, my position stands, but if MCD decides to offer table service short sellers should start to take notice too.