Is McDonald’s a Tasty Buy on the Pullback?

MoneyWith McDonald’s (NYSE:MCD) releasing third quarter financial results and currently trading in the red, is the blue-chip member a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

E = Earnings Are Increasing Quarter over Quarter

The land of the golden arches has been questionable when it comes to increasing earnings each quarter. For the first quarter of 2012, earnings fell to $1.23 a share, down from $1.29 in the fourth quarter of 2011. Last year’s fourth quarter profit of $1.29 was also lower than $1.43 earnings per share in the third quarter of 2011.

On Friday, McDonald’s reported its financial results for the third quarter. Net income fell to $1.46 billion ($1.43 per share), compared to $1.51 billion ($1.45 per share) a year earlier. Revenue for the company also edged slightly lower to $7.15 billion, compared to $7.17 billion in the same period last year. Excluding currency fluctuations, revenue increased 4 percent, though.

“While our sales momentum and current financial results reflect today’s challenging conditions, we continue to see significant long-term opportunities for brand McDonald’s and remain confident in the underlying strength of our business model,” said McDonald’s CEO Don Thompson. “We have the right plans in place to drive long-term profitable growth along with the experience and alignment throughout the McDonald’s System to navigate the current environment.”

T = Technicals on the Stock Chart are Weak

As the chart below shows, the comments from Thompson did little to comfort investors. Shares of McDonald’s dropped more than 3 percent on Friday, making it the worst performer in the Dow Jones Industrial Average. The decline caused shares to gap through the 200-day moving average. This is concerning from a technical standpoint, as shares spent very little time above the 200-day MA in recent months, indicating that the average will now serve as strong resistance. Since falling below the 200-day MA in May, shares have been unable to sustain a move above it. Now, McDonald’s is trying to find support at the 100-day MA.

Although the new gap on McDonald’s stock chart may cause a short-term bounce, as seen in late July and early August, we are keeping a close eye on support between $84 and $86. This range has served as support over the past year, and may signal the end of the most recent decline. This proved to be the case in June when shares dipped below $86 and the Relative Strength Indicator briefly fell below 30, which is considered oversold territory. Longer-term support stands at $80 a share.

Other names in the quick-service restaurant industry also declined along with McDonald’s. Shares of Burger King (NYSE:BKW) and Jack in the Box (NASDAQ:JACK) plunged 4.25 percent and 6.10 percent, respectively. Meanwhile, Yum! Brands (NYSE:YUM), which is home to Taco Bell and KFC, declined 2.25 percent.

Conclusion

McDonald’s is a solid company overall. Every time I pass by one of their locations, there is always a large line at the drive-thru. Using a simple valuation method such as the price-to-earnings ratio, the company is cheaper than Yum! Brands and Jack in the Box. However, that does not mean it is immune from problems. Increasing commodity prices and rising competitors in emerging markets are serving as headwinds for McDonald’s. While its stock chart is not broken like a Chipotle Mexican Grill (NYSE:CMG) chart, the recent movement does give us caution. Thus, we believe McDonald’s is a WAIT and SEE.

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