Editors Note:

When you are the biggest in the sector all the little guys are either trying to copy you or topple you. I doubt anyone is going to be copying a Big Mac but there are plenty of competitors implementing their own all day breakfast. Until they have 35,000 stores to compete with McDonalds, it will not matter.



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MCD - McDonalds - Company Profile

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 2015, it operated 36,525 restaurants, including 30,081 franchised restaurants and 6,444 company-operated restaurants. McDonalds was founded in 1940 and is based in Oak Brook, Illinois.

McDonalds has been on a roll recently and set a new high in May at $132. Analysts could not say enough about the turnaround the company was making. Since they went to all-day breakfast items in October the customer traffic has exploded. Unfortunately, all those Egg McMuffins had a negative impact on sales.

The company was selling more items but at cheaper prices. Breakfast items are cheaper than Big Macs and other lunch/supper items. The company reported revenue of $6.26 billion and earnings of $1.45. They beat the $1.38 earnings estimate but missed slightly on the $6.27 revenue estimate. Also, same store sales rose only 1.8% in the U.S. compared to expectations for a 3.2% increase.

Analysts credited part of the revenue shortfall with the industry wide slowdown in the fast food sector. YUM Brands and Starbucks also posted sales declines. Others pointed out that McDonalds sales spiked at the same time Chipotle sales plunged because of their food problems.

Analysts were also quick to point out that international same store sales rose 7.7% in the 100 "foundational markets" covering 100 countries.

McDonalds announced it was farther along in eliminating antibiotics from their chicken, previously targeted for March 2017, had removed the preservatives from the Chicken McNuggets and was removing high fructose corn syrup from its hamburger buns in August. The company is moving in the right direction for long-term improvement.

Analysts believe McDonalds will get control of its all day breakfast menu pricing and will benefit from the longer term menu changes.

Deutsche Bank, Credit Suisse, UBS, RBC Capital and Argus all reiterated their buy ratings with price targets averaging $138.

Earnings Oct 21st.

Shares appear to be rebounding from the post earnings crash. I am recommending the October call just in case we need more time for the post earnings depression to wear off. McDonalds is a Dow component so it will be reactive to the gains and losses in the Dow. With August historically the weakest month for the Dow we could see some volatility in MCD and need the extra time.

Buy Oct $120 call, currently $2.71, no initial stop loss.


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