The bad news about fast-food giant
is getting increasingly difficult for investors to swallow.
Late Friday, Moody's Investors Service put the restaurant operator's "Aa3" long-term debt rating -- the agency's fourth-best ranking -- on review for possible downgrade, citing negative same-store sales trends in the U.S. and Europe. On the news, shares were lately down 32 cents, or 2%, at $15.43, their worst level since 1995.
Predictably, corporate credit spreads for McDonald's widened after the Moody's announcement. Since Thursday, McDonald's April 2011 notes have widened 20 basis points over Treasuries, according to John Atkins, an analyst at independent market research firm IDEAglobal.com.
Atkins downplayed the negative reaction, however. "It doesn't look like there is panic," he said. "Despite the fact that equity prices might suffer, the debt will probably settle down pretty quickly." Moody's itself said any rating change would be modest, given the overall health of the company.
To its credit, McDonald's still has an attractive balance sheet and a strong cash flow position. "A downgrade would affect interest rates on existing debt. But I do not expect McDonald's to issue debt going forward. This is not a financing story," said Mitchell Speiser, an analyst at Lehman Brothers.
Still, the Moody's announcement comes at a tumultuous time for McDonald's. And the news does little to reinsure investors who have seen the stock sliced in half over the last six months.
Last Tuesday, McDonald's issued its eighth profit warning in nine quarters, amid slumping sales. Two weeks earlier, the company's chief executive, Jack Greenberg, stepped down after 21 years with the company.
McDonald's expects fourth-quarter earnings before restructuring costs of 25 cents to 26 cents a share, well below previous analysts' estimates of 31 cents a share, according to Thomson Financial/First Call.
In October, McDonald's said that it would scale back its restaurant opening schedule, something analysts had been advocating as a way of reining in costs. However, the restaurant operator also reintroduced its dollar value menu, locking it in a price war with
Jack in the Box
and others at the expense of margins.
For the sake of the fast-food sector, analysts are calling on McDonald's to get rid of the dollar menu. "McDonald's discounting activity is not only hindering the Golden Arches' financials, but the entire fast-food sector's health," said Mark Kalinowski, an analyst at Salomon Smith Barney, in a research note.