Don't Expect Surprises From McDonald's

 | Oct 21, 2016 | 2:00 PM EDT
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There are two ways to look at McDonald's (MCD) at the moment.

The first is through the prism of a three-year timeframe. If you are truly able to hold a stock for three years -- riding out the quarterly ups and downs in performance and Wall Street sentiment -- then biting into McDonald's is worth it. For starters, I continue to be a fan of McDonald's CEO Steve Easterbrook (despite what my tweets on the company suggest). He is levelheaded, very analytical and isn't going to revert back to the old ways at McDonald's, such as stuffing the menu with useless limited-time offerings and ineffective promotions. The British-born exec has signaled as much in announcing a serious overhaul of his executive team of late.

Easterbrook gets where McDonald's needs to be and has a plan to eventually get the large ship there. As a result of that methodical approach to transformation, McDonald's will likely continue to find more areas to slash costs beyond what is being articulated to Wall Street and use proceeds to buy back more stock and pay out a higher dividend. A sale of certain Asian assets, likely before year end, will only add fuel to the company's capital return plan. All of these factors could go a long way in smoothing out the peaks and valleys in same-store sales normally inherent to fast-food companies.

But while the longer-term outlook for McDonald's looks reasonable, the next six months could be mixed due to deflation at grocery stores and tough sales comparisons, most notably in the U.S. Nothing on McDonald's earnings call on Friday afternoon stoked the kind of optimism needed to move aggressively into the stock. Easterbrook didn't sound like an executive willing to come up with weird new food to drive short-term sales pops. He isn't going to conjure up crazy promotions that erode franchisee profitability in an attempt to pump up sales. In short, McDonald's is likely to continue to do what it has been doing -- executing on improving its operations and fine-tuning its food. Those are great efforts for the long-term health of the brand, but could disappoint Wall Street as they aren't the elements that immediately lead to surprising, stock-moving sales gains.

So stay clear of McDonald's here. But if so inclined to leverage the Golden Arches' latest results, a wager against Restaurant Brands (Burger King and Tim Horton's) may be interesting. Burger King (BKW) is starting to look like a restaurant company doing everything wrong for the long term (using McDonald's as a benchmark). It continues to roll out weird new limited-time offerings to mixed success. It's not making any discernible investment in improving food quality or restaurant operations. And the mobile ordering component is nonexistent. At some point soon, the tide could turn against Restaurant Brands. It would be good to position ahead of that happening.

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