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Fast-Food Giant's Breakout Setting Stock Up for a Double-Digit Rally
McDonald's (NYSE: MCD), the world's largest fast-food chain by sales, doesn't just serve up tasty burgers. It also offers traders an upbeat growth outlook and technical strength, complimented by an appealing dividend. The company, which already operates in about 120 countries, through more than 33,000 outlets, keeps growing, thanks to international expansion and menu item adaptation.
Worldwide, people have developed a taste for McDonald's. In North America and Europe, sales have only increased 9% over the past four years. However, in Asia-Pacific, the Middle East and Africa, sales have risen over 50% in the same time period.
In part, McDonald's has achieved such rampant international growth by suitably adapting its regional menu choices. For example, in India, where nearly half the population is vegetarian, the company will open vegetarian-only locations. At present, there are just over 270 McDonald's in India. However, with a population of over 1 billion people, the growth opportunities there are tremendous. And India is just one country. In China, the world's largest population, McDonald's is opening hundreds of new outlets.
In North America, the burger joint is attempting to increase growth through more breakfast options and healthier menu items. The most obvious example is the "McWrap," which has become a permanent menu item, with the company launching a big ad campaign on April 1.
The company's hope is to draw customers -- particularly the 59 million Americans aged 23 to 36 seeking healthier, fresh food choices -- away from restaurants like Subway, the largest fast-food chain by number of stores.
Thanks to these innovative menu additions, management anticipates revenue will increase, and shareholders certainly appear optimistic about the company's growth potential. From a technical perspective, the stock appears strong.
Shares have just broken $100 -- an important psychological resistance level. This level was unsuccessfully challenged four times over the past four trading weeks. But, the more times resistance is tested, the more likely it is to break the next round. Sure enough, this April 1 trading week, shares closed above $100, setting a new all-time high.
In early 2012, shares approached this high, hitting $99.13. However, unable to sustain momentum, the stock slid, finally establishing support around the $84 level by mid-May. This support level was again approached in August 2012, and tested for a third time in November 2012. This created a technical formation known as a triple-bottom.
Rising off the November bottom, the stock has steadily climbed since, forming an intermediate-term uptrend line. An ascending triangle -- formed by the intersection of the uptrend line and $100 resistance -- has just now bullishly broken.
According to the measuring principle for a triangle, calculated by adding the height of the triangle to the breakout level, shares could reach a new target of $117.36 ($100-$82.64 = $17.36; $17.36+100 = $117.36). At current levels, this target represents potential 17% returns. However, with no overhead resistance in sight, the stock could move much higher.
Supporting this upbeat technical outlook are bullish fundamentals.
For the upcoming first quarter of 2013, to be reported April 19, analysts expect revenue to rise 0.8% to $6.6 billion compared with $6.55 billion last year. Due to international growth, analysts estimate full-year 2013 revenue will expand 4.5% to $28.8 billion from $27.57 billion last year.
The earnings outlook is equally strong. For the upcoming quarter, analysts expect new menu items will help earnings rise 3.3% to $1.27 per share from $1.23 in the comparable year-ago period. For the full 2013 year, analysts project overseas growth will cause earnings to increase 7.8% to $5.78 per share from $5.36 per share last year.
In addition to a sound technical and fundamental outlook, the company offers an attractive forward annual dividend of about 3.1%, or $3.08 per share. And this dividend is not likely to go away anytime soon. Management has raised the payout every year since 1976, when the dividend was first initiated.
Risks to consider: In North America, the younger population appears to be turning its back on McDonald's in favor of healthier menu options. The company is adapting by offering a new lower-calorie wrap, which is expected to steal market share from competitors. But, if the attempt fails, McDonald's could have trouble retaining this large consumer group. However, the company has a history of adapting and innovating to attract new customers and should continue to do so well into the future.
Recommended Trade Setup:
-- Buy MCD at the market price
-- Set stop-loss at $87.79, just below a nearby support level
-- Set initial price target at $117.36 for a potential 17% gain by late 2013